In a recent report on the fiscal health of all the 28 Indian states, the Comptroller and Auditor General of India has found that the debt to gross state domestic product ratio has trebled over the past 10 years, from Rs 17.57 lakh crore in 2013-14 to Rs 59.60 lakh crore in 2022-23. For some states, the ratio is quite high. Punjab has the highest ratio at 40.35%. West Bengal, another major state, has a ratio of 33.70%. There are many implications of this rising stock of debt. The first implication is that it increases the perceived risk of the borrower — the state — from the lender’s point of view. Hence, the cost of borrowing goes up for any additional debt that is planned to be incurred. Next, it has been found that states use borrowings not for building capital assets but to pay for current revenue expenditures. This, in turn, implies that the debt is not being used to enhance the productive capacity of the economy, thereby restricting the state’s future ability to repay. One might argue that the state may be incurring a lot of expenditure on welfare schemes or social expenditures that improve the economic well-being of residents. This may have short-term benefits, but unless they translate into augmented incomes for the state, the high-risk perception would remain. In some states, the expenditures may not even be improving the economic well-being of residents. Spending may be focused on unproductive sectors or there could be significant leakages from corruption and mismanagement. Finally, unless mindfully avoided, unchecked borrowing could lead to a situation where the state has to borrow to meet its interest payments. This would be the classic case of a debt trap.
The risk needs to be reduced in different ways. A state would have to ensure that the spending is carried out only to create public infrastructure or other capital assets; it must also raise the ability to attract private investors both from within and outside the state. A state’s ability to raise taxes, given the fiscal architecture, is limited. The only long-term solution is to be careful with spending programmes with a plan for growth in GSDP along with a roadmap for containing the state’s fiscal deficit. This is no mean task. Fiscal austerity must be balanced with the need to grow. The Union government has to ensure that a balanced growth of all geographical regions is monitored and engineered. The regional differences in economic performance and fiscal health are quite stark. India’s states require stronger economic fortifications.