State Debt Sustainability in India, Meaning, Status, Measures

State Debt Sustainability in India refers to the ability of State governments to meet present and future debt obligations without cutting essential development spending or depending excessively on new borrowing. State finances have come under greater attention as debt has increased sharply over the past decade. The issue is not only the size of debt but also how borrowings are used, the revenue available for repayment and the economic growth supporting the debt burden.

State Debt Sustainability in India Need

State Debt affects fiscal stability, public investment and the ability of governments to finance essential services. A sustainable debt path allows borrowing for productive development without creating excessive repayment pressure.

• Rising State Debt: State governments’ total debt increased from ₹17.57 lakh crore in 2013-14 to ₹59.60 lakh crore in 2022-23, a 3.39 times increase over the decade.
• Higher Debt Burden: States’ overall debt increased from 22.8 per cent of GSDP in 2011-12 to 31 per cent in 2020-21 before moderating to 28.8 per cent in 2024-25.
• Development Spending: Unsustainable borrowing can reduce funds available for infrastructure, health, education and other development needs because rising interest payments absorb fiscal resources.
• Intergenerational Equity: Borrowing for non productive expenditure transfers repayment obligations to future generations without creating assets that can support future economic growth.

What is State Debt Sustainability?

State Debt Sustainability in India means maintaining debt at a level that States can service through their revenues and economic growth while continuing necessary public expenditure.

• Debt to GSDP Ratio: This ratio compares outstanding State Debt with Gross State Domestic Product. The CAG reported that State Debt to GSDP increased from 16.66 per cent in 2013-14 to 22.96 per cent in 2022-23.
• Fiscal Targets: The FRBM Review Committee recommended total public debt of 60 per cent of GDP, with 40 per cent for the Centre and 20 per cent for States. The 15th Finance Commission prescribed 30.9 per cent fiscal liabilities for States by 2024-25.
• Debt Utilisation: Borrowing is more sustainable when funds create productive assets. Infrastructure and capital formation can improve future economic capacity and support repayment.
• Debt Sustainability Index: A proposed composite index uses Domar Gap, Debt Buoyancy, Debt to GSDP, Debt to Revenue Receipts and Capital Expenditure to Debt. The first four receive 15 per cent each, while capital expenditure receives 40 per cent.
• Repayment Capacity: The debt to revenue receipts ratio varies sharply among States. It ranges from 0.8 in Arunachal Pradesh to 3.6 in Punjab, showing major differences in repayment capacity.

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State Debt Sustainability Status in India

State Debt Sustainability in India shows significant differences across States, with debt levels, revenue capacity, economic growth and quality of expenditure varying considerably.

• Overall Debt Position: States’ debt reached ₹59.60 lakh crore in 2022-23. State Debt also equalled 22.17 per cent of India’s GDP during FY 2022-23.
• High Debt States: Punjab recorded a debt to GSDP ratio of 40.35 per cent, followed by Nagaland at 37.15 per cent and West Bengal at 33.70 per cent in 2022-23.
• Lower Debt States: Odisha recorded 8.45 per cent, Maharashtra 14.64 per cent and Gujarat 16.37 per cent. Eight States had debt above 30 per cent, while six remained below 20 per cent.
• Sustainability Differences: The Debt Sustainability Index shows limited correlation with the debt to GSDP ratio. Punjab and West Bengal had index values below 0.2, while Odisha scored above 0.9.
• Fiscal Prudence: Sixteen States with index values above 0.6 were considered fiscally prudent. This indicates that a higher debt ratio alone does not fully determine sustainability.
• Growth and Solvency: Between 2021 and 2025, GSDP growth exceeded the average interest rate by about 8 per cent. This indicates favourable conditions for meeting debt obligations.
• Asset Creation: In eleven States, including Punjab, Kerala and Tamil Nadu, debt exceeded cumulative assets. This indicates inefficient use of borrowings for productive asset creation.
• Fiscal Health Index: NITI Aayog’s Fiscal Health Index, released in January 2025 using FY2022-23 CAG data, assessed 18 major States on revenue, expenditure, debt and fiscal deficit indicators.
• State Fiscal Health: Odisha recorded the highest Fiscal Health Index score of 67.8, followed by Chhattisgarh, Goa, Jharkhand and Gujarat. Punjab, Andhra Pradesh, West Bengal and Kerala faced significant fiscal challenges.

State Debt Sustainability in India Challenges

The sustainability problem arises from differences in fiscal capacity, expenditure patterns and debt use. Several structural factors can increase repayment pressure and reduce development space.

• Inter State Differences: States differ widely in income, economic growth, revenue capacity and expenditure requirements. Therefore, identical debt ceilings may not reflect their actual fiscal conditions.
• Revenue Expenditure: Borrowing for salaries, pensions, subsidies and other current expenses does not create corresponding assets. This weakens the quality of State borrowing.
• Committed Expenditure: Salaries, pensions, wages and interest payments consume a large share of State revenue. Between 2013-14 and 2022-23, committed expenditure remained above 42 per cent of total revenue expenditure.
• Weak Revenue Base: States face limitations in own tax revenue mobilisation. Property tax, alcohol excise and motor vehicle taxes remain under exploited in several States.
• Subsidy Burden: Farm loan waivers, free electricity, subsidised water, transport concessions and cash transfers can increase revenue expenditure without creating productive assets.
• Interest Burden: A growing debt stock increases debt servicing costs. Higher interest payments reduce fiscal space for infrastructure and other development expenditure.
• Off Budget Borrowing: Borrowing through State owned entities can hide the actual liability position. Such practices make the assessment of State Debt Sustainability less transparent.
• Economic Shocks: COVID 19 increased borrowing for healthcare, food distribution and welfare support. Slower GSDP growth can further increase debt ratios.
• Golden Rule Violation: The CAG found that 11 States, including Andhra Pradesh, Punjab and West Bengal, used borrowings for revenue expenditure. Andhra Pradesh spent only 17 per cent of borrowings on capital expenditure, while Punjab spent 26 per cent.

State Debt Sustainability in India Measures

A sustainable framework should combine fiscal discipline with State specific conditions. Borrowing limits, revenue reforms, transparent accounts and productive expenditure can strengthen long term fiscal stability.

• State Specific Targets: Fiscal consolidation should consider differences in economic capacity, development needs, revenue strength and existing debt instead of applying identical limits to every State.
• Multi Dimensional Assessment: The Finance Commission should use indicators covering debt stock, repayment capacity, growth, interest costs and productive use of borrowing.
• Revenue Mobilisation: States should strengthen own tax and non tax revenues, improve tax buoyancy and diversify revenue sources to reduce excessive dependence on central transfers.
• Productive Borrowing: Borrowings should primarily support infrastructure and capital formation. This can create assets and improve future economic capacity for debt repayment.
• Fiscal Transparency: States should disclose off budget borrowings, guarantees and contingent liabilities clearly. Annual Debt Sustainability analysis can improve monitoring and accountability.
• Performance Linked Grants: Block grants can include Key Performance Indicators for fiscal discipline, expenditure efficiency and debt management. This can link additional fiscal support with measurable outcomes.
• Institutional Oversight: Stronger CAG oversight, empowered State Finance Commissions and better coordination between States and the Centre can improve fiscal management.
• Debt Management: A Public Debt Management Agency can support better monitoring, transparency and restructuring of public debt. States also need to maintain borrowing within credible fiscal limits.