States' debt burden and fiscal gaps persist, leaving capital spending muted

10 states with the highest debt to GSDP ratio have debt levels above 30% of GSDP

Bringing down India’s debt to gross domestic product (GDP) ratio will be the core priority for the government from the next financial year, which begins on April 1, Finance Minister Nirmala Sitharaman said last week. The high debt to GDP ratio in some states is a cause of “worry”, she said, echoing post-pandemic assessments made by the Reserve Bank of India (RBI).

 

The FRBM Review Committee had in 2017 recommended that states reduce their debt to 20 per cent of gross state domestic product (GSDP) by FY23. That has not happened: The RBI projects that aggregate state debt will rise to 27 per cent of GSDP by FY27, up from 26 per cent in FY20, indicating that medium-term consolidation targets remain out of reach.

 

States’ debts remain high well beyond the pandemic years. The top 10 states with the highest debt to GSDP ratio  have debt levels above 30 per cent of GSDP. Punjab and Himachal Pradesh have debt ratios above 45 per cent. Tamil Nadu, a larger and relatively stronger economy, has debt above 30 per cent of GSDP. States have moderated debt levels from the pandemic’s peak in FY21 but the pace of correction is slow. States and union territories in FY25 had an aggregate debt to GSDP of 28.8 per cent (Budget estimates), higher than the RBI’s projected level for FY27. Recent actuals suggest that debt consolidation has stalled, pointing to structural fiscal pressures rather than a temporary crisis-driven expansion. 

 

Persistent high debt is linked to the scale of fiscal slippages in several states. In FY23, Punjab recorded a fiscal deficit of 5 per cent of GSDP, Himachal Pradesh of 6.5 per cent and Bihar of 6 per cent (actuals), making them three of the top five high-debt states running deficits well above the 3 per cent (3.5 per cent for those carrying out power sector reforms) threshold. In revised estimates for FY24, Bihar’s fiscal deficit widened further to 8.9 per cent of GSDP, while Himachal Pradesh’s was at 6.1 per cent and Punjab’s at 4.1 per cent. Large revenue deficits and fiscal gaps indicate that a significant share of states’ borrowing finances routine expenditure rather than capital creation, limiting the scope for durable debt reduction. 

 

While capital outlay has increased in select states, the overall shift towards investment-led spending remains limited. Apart from Goa, Himachal Pradesh and Bihar — where capital outlay has risen more visibly as a share of GSDP — most high-debt states have not recorded a significant increase in capital spending. In Kerala, Tamil Nadu and Haryana, capital outlay as a percentage of GSDP has either stagnated or declined compared to pre-pandemic levels. At the same time, revenue expenditure continues to absorb a large share of GSDP across states. This weak rebalancing towards capital outlay suggests that higher borrowing has not translated into a broad-based push for growth-enhancing investment.