Clipped from: https://www.thehindubusinessline.com/opinion/editorial/states-of-debt/article70557135.ece
States must curb populist spending
RBI: Flagging States’ debt situation | Photo Credit: FRANCIS MASCARENHAS
The Reserve Bank of India’s study of State budgets of 2025-26 indicates an urgent need to make States follow the path of fiscal prudence. The trend is shifting — while the consolidated gross fiscal deficit of States was on a declining trajectory from the FY21 high of 4.1 per cent of GSDP, it has now begun to creep up. At 3.3 per cent of GSDP in the budget estimates for FY26, the gross fiscal deficit of States is the highest in the past decade, excluding FY21. Further, 13 States have budgeted for a fiscal deficit above 3.5 per cent of GSDP, with larger States such as Madhya Pradesh, Andhra Pradesh, Rajasthan and Punjab estimating their respective GFD-GSDP ratios to cross 4 per cent in FY26.
Given the tendency of most States to overestimate their revenue receipts, the actual deficit numbers for FY26 can be much wider. Lower growth in direct and indirect tax revenue of the Centre for FY26 will also lead to lower devolution, which can further stress their fiscal situation. The silver lining in State finances has been the increase in capital expenditure, largely led by the 50-year interest free loans given by the Centre. Capital expenditure has been centred around irrigation, water supply, transport and urban infrastructure. But the red flag being raised by the RBI’s study regarding profligate spending under revenue expenditure must be heeded.
The report highlights that many States have included doles in the form of farm loan waivers, free electricity, subsidised transport, allowances for unemployed youth and direct cash transfers to women in the Budgets for FY26. While some giveaways are probably acceptable, they will increase fiscal stress when revenue receipts are under pressure. The payouts related to the Eighth Pay Commission will increase revenue expenditure from FY28. Market borrowings of States is likely to exceed the ₹12.45 lakh crore budgeted for FY26. At an aggregate level, the outstanding debt of States stands at 29.2 per cent of GDP, far higher than the 20 per cent level mandated by the FRBM review committee. The ratio ranges between 17.8 per cent to 46.3 per cent with several States having debt levels above 30 per cent of their GSDPs. Off-budget borrowings of States are also increasing; outstanding guarantees given to state public sector undertakings stood at 3.9 per cent of GDP by the end of March 2024 and may have risen in FY25. In order to improve transparency, the Centre must adopt a uniform accounting framework by 2027-28, as mandated by the Comptroller and Auditor General of India.
A shift from fiscal deficit-to-GDP ratio to debt-to-GSDP ratio as a budgetary metric is expected to provide some leeway in spending. States should seriously consider ways to augment own tax revenue. Compliance needs to be improved through higher digitisation. Amnesty schemes, land and asset monetisation, and market-linked pricing for some public utilities are some ideas. Above all, spending with an eye on poll outcomes must be curbed.
Published on January 27, 2026
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