States are borrowing just to get by, not to build productive assets

Even prosperous southern states used a large part of FY25 debt for operational expenses

Investment is the bedrock of economic growth. Capital formation creates the assets that drive jobs, raise incomes, and elevate living standards. To sustain this momentum, states need immense funding — and when their own revenues fall short, they must turn to debt. 

However, states routinely violate the golden rule of borrowing. Instead of building assets, borrowed money is increasingly swallowed up by operational costs — a risky trend Union Finance Minister Nirmala Sitharaman recently warned against, urging states to redirect debt back into long-term capital expenditure. 

States are leaning harder on debt to cover their budgets. Their public debt receipts, as a share of their revenue receipts, increased from 133 per cent in FY16 to 186 per cent in FY25 – the highest after 191 per cent in the pandemic year of FY21. However, public debt as a share of states’ gross state domestic product (GSDP) has held steady at 23 per cent since FY23. 

The Comptroller and Auditor General of India’s “State Finances 2024-25” report shows how money borrowed by states is allocated for capital expenditure (capex). In the past decade, states' capex doubled from ₹4.16 trillion in FY16 to ₹8.49 trillion in FY25. Their debt receipts nearly quadrupled from ₹5.67 trillion to ₹20.17 trillion. Consequently, the share of states’ capex in their gross public debt receipts declined from 73.37 per cent in FY16 to 42.09 per cent in FY25, indicating they are borrowing to finance their revenue deficit. 

Capex made up a small share of net public debt receipts across the southern states in FY25. Andhra Pradesh and Kerala spent just 20.67 per cent and 35.89 per cent of their net public debt receipts, respectively, on capex projects. Tamil Nadu, Karnataka and Telangana posted similarly modest capex shares in their net public debt. Punjab spent 20 per cent of its net public debt receipts on capex – the lowest among states in FY25. (Note: state capex figures exclude loans and advances). 

Among states running a revenue deficit in FY24 and FY25, Tamil Nadu was the only one that didn’t increase its reliance on net debt receipts to cover operational gaps. Across these deficit states, the share of net debt receipts absorbed by revenue deficits jumped from 44.67 per cent in FY24 to nearly 53 per cent in FY25. 

Punjab’s revenue deficit in FY25 absorbed 95 per cent of its net debt receipts. Andhra Pradesh’s and Kerala’s revenue deficits absorbed 77 per cent and 74 per cent of their net public debt, leaving little for capex. 

Another indicator of debt quality is the ratio of revenue deficit to fiscal deficit. At the Union level, revenue deficit accounted for just one-third of the fiscal deficit in FY25 — the lowest level this century. It means that a greater proportion of the Union’s borrowings are being used for capex.