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The Comptroller and Auditor General (CAG) of India has released a first-of-its-kind decadal report (2013–14 to 2022–23) analysing the fiscal health of Indian states, highlighting a worrying surge in public debt and its implications for fiscal sustainability and cooperative federalism.

Understanding Public Debt

• Public debt arises when government expenditure exceeds revenue from taxes and other receipts, prompting borrowing to bridge the fiscal gap. For states, such debt includes liabilities under the Consolidated Fund of the State, comprising internal debt and loans and advances from the Centre.
• Internal debt consists of marketable securities like government bonds and treasury bills, and non-marketable debt such as loans from financial institutions like LIC and NABARD or the Reserve Bank’s Ways and Means Advances (WMA).
• The Debt-to-GSDP ratio is a key indicator of fiscal sustainability, reflecting a state’s capacity to service its debt. A higher ratio implies greater fiscal stress.
• The NK Singh Committee on FRBM (2016) recommended a combined general government debt ceiling of 60% of GDP — 40% for the Centre and 20% for states.

Key Findings of the CAG Report

• The CAG report reveals that the aggregate public debt of 28 states trebled over the past decade — from ?17.57 lakh crore in 2013–14 to ?59.60 lakh crore in 2022–23.
• As a share of combined GSDP, debt rose from 16.66% to 22.96%, with state debt accounting for 22.17% of India’s GDP in FY 2022–23.

Inter-State Variations

Fiscal vulnerability varies widely:

• Highest debt-to-GSDP ratios: Punjab (40.35%), Nagaland (37.15%), and West Bengal (33.70%).
• Lowest ratios: Odisha (8.45%), Maharashtra (14.64%), and Gujarat (16.37%).
  As of March 2023, eight states had debt exceeding 30% of GSDP, while six states maintained it below 20%.

Debt Sustainability and Composition

• The states’ debt-to-revenue receipts ratio ranged from 128% (2014–15) to 191% (2020–21), averaging about 150% of total receipts.
• The debt-to-GSDP ratio oscillated between 17–25%, with a sharp rise during the COVID-19 pandemic year (2020–21) due to falling GSDP and increased borrowing for relief and GST compensation.
• Major sources of debt include open market borrowings, RBI advances, institutional loans, and back-to-back loans from the Centre in lieu of GST shortfall and capital assistance.

Fiscal Management Concerns

• The report flags a violation of the “golden rule of borrowing”, which stipulates that governments should borrow only for capital formation, not to finance revenue expenditure.
• Eleven states, including Andhra Pradesh, Punjab, Kerala, and West Bengal, used borrowings to fund current expenses.
• In Andhra Pradesh, only 17% of borrowings went to capital expenditure; in Punjab, 26%.

Such practices threaten fiscal sustainability, crowd out productive investments, and risk pushing states into a debt trap, thereby undermining macroeconomic stability.

Way Forward

• Fiscal Discipline: States must prioritise borrowing for productive infrastructure and avoid financing recurring expenditure.
• Debt Management Reforms:Operationalising the Public Debt Management Agency (PDMA) could ensure transparency and better coordination in debt operations.
• Revenue Strengthening: Enhancing tax buoyancy, rationalising subsidies, and diversifying revenue bases can reduce dependence on central transfers.
• Adherence to FRBM Targets: States should align fiscal deficit and debt ratios with FRBM norms to ensure long-term sustainability.
• Institutional Oversight: Strengthening State Finance Commissions and CAG monitoring can promote accountable and sustainable fiscal federalism.

Conclusion

The surge in state-level debt underscores the growing strain on subnational fiscal capacity. While borrowing is essential for development, unchecked debt accumulation and non-productive spending threaten fiscal stability. Ensuring fiscal prudence, efficient debt management, and adherence to reform frameworks like FRBM are vital to preserving India’s long-term macroeconomic resilience and cooperative federal balance.