The Comptroller and Auditor General of India (CAG) has unveiled a pioneering decadal study on the finances of all 28 Indian states, spanning from 2013-14 to 2022-23. This report spotlights a dramatic threefold rise in combined public debt, climbing from Rs 17.57 lakh crore to Rs 59.60 lakh crore, amid warnings about states increasingly borrowing for everyday expenses rather than long-term investments, potentially jeopardizing economic stability.
What is Public Debt and Why Do States Borrow Money?
Public debt refers to the money that state governments borrow when their income from taxes, fees, and grants falls short of what they need to spend; it's like taking a loan to cover expenses or invest in growth.
States borrow mainly to fund big projects like roads, schools, or hospitals, which are called capital expenditures and help boost the economy in the long run; however, they sometimes use it for daily costs like salaries or subsidies, which can create problems later.
Sources include selling bonds in the market, getting loans from banks or the RBI for short-term needs, or borrowing from bodies like LIC and NABARD; this helps states manage cash flow but adds interest costs over time.
What Does the CAG Report Reveal About the Rise in State Debt?
The report shows a threefold increase in total debt from Rs 17.57 lakh crore in 2013-14 to Rs 59.60 lakh crore in 2022-23, highlighting a steady buildup over 10 years.
As a portion of GSDP—the total value of goods and services produced in a state—debt grew from 16.66% to 22.96%, meaning states are carrying more burden relative to their economic output.
This rise equals 22.17% of India's overall GDP in 2022-23, showing how state finances affect the national economy; recent RBI data notes a slight dip to 27.6% of GSDP by March 2024, but concerns persist.
What Caused This Sharp Increase in Debt?
The COVID-19 pandemic in 2020-21 caused a big economic slowdown, shrinking GSDP and forcing states to borrow more, leading to a 4% jump in the debt ratio that year.
Central government loans rose for GST shortfalls—since GST started in 2017, some states lost revenue—and for capital spending; populist policies like subsidies and welfare schemes also added pressure.
Fixed expenses, such as salaries, pensions, and interest, consume 50-60% of budgets in many states, leaving less for development and pushing more borrowing, as per PRS India analysis.
How Do Debt Levels Vary Across Different States?
Northern and eastern states like Punjab (40.35% debt-to-GSDP), Nagaland (37.15%), and West Bengal (33.70%) have the highest ratios, often due to high subsidies like free power for farmers in Punjab.
States like Odisha (8.45%), Maharashtra (14.64%), and Gujarat (16.37%) manage lower levels through better revenue from mining or industries and stricter fiscal controls.
Eight states exceed 30% of GSDP in debt, signaling high risk, while RBI notes five states above 40% in recent years, with regional divides between North-South and industrial vs. agrarian areas.
What is the 'Golden Rule' of Borrowing and Why Are States Breaking It?
The golden rule means borrowing should only fund investments that create assets, not cover daily running costs like salaries or deficits; this keeps debt sustainable.
Eleven states, including Andhra Pradesh and Kerala, used loans for revenue deficits in 2022-23, with capital spending as low as 17% of borrowings in some cases, violating this rule.
This happens because committed expenses eat up revenues, and political promises like subsidies force reliance on debt, leading to a cycle of more borrowing just to pay interest.
What Are the Impacts of High State Debt on the Economy?
High debt means more money goes to interest payments—10-15% of revenues—leaving less for essential services like education and health, slowing growth.
It can lower credit ratings, making future loans costlier, and if states cut spending to repay, it hurts jobs and infrastructure; nationally, state debt affects India's goal of a $5 trillion economy.
PRS India warns that contingent liabilities like guarantees (3.9% of GSDP) add hidden risks, especially in power sectors, potentially turning into real debt if defaults occur.
How Can States Improve Their Fiscal Health?
Follow FRBM Act targets, like limiting fiscal deficits to 3% of GSDP and eliminating revenue deficits, to control borrowing.
Boost own revenues through better tax collection—states tap only 40-50% of GST potential—and cut wasteful subsidies, as suggested by RBI reports.
Prioritize capital over revenue spending, use central incentives like interest-free loans, and improve efficiency in areas like power reforms to reduce losses.
© 2025 Gaining Sun. All rights reserved.