India’s states closed FY23 with public debt equivalent to nearly 23% of their combined economic output, with several breaching prudential limits set by the Finance Commission, raising concerns over fiscal sustainability.
According to the State Finances 2022–23 report from the Comptroller and Auditor General (CAG), the 28 states together carried a public debt burden of ₹59.6 trillion, equal to 22.96% of their combined GSDP, up more than threefold from FY14. When public account liabilities such as provident funds and deposits are included, total state liabilities rose to ₹72.7 trillion, or 28% of GSDP.
Eight states had public debt exceeding 30% of GSDP in FY23 — Punjab (40.3%), Nagaland (37.1%), West Bengal (33.7%), Himachal Pradesh (33.1%), Bihar (32.6%), Meghalaya (31.4%), Manipur (31%) and Arunachal Pradesh (30.7%). Punjab was the most indebted, with overall liabilities rising to 45.9% of GSDP.
By contrast, Odisha (8.5%), Maharashtra (14.6%) and Gujarat (16.4%) recorded the lowest debt ratios, suggesting tighter fiscal discipline.
Breach of Debt Ceiling
The XV Finance Commission had advised states to cap total liabilities at 33.3% of GSDP. Yet 11 states overshot the limit, including Punjab, Himachal Pradesh, West Bengal, Bihar, Rajasthan, Kerala and several north-eastern states.
The report flagged worrying trends in how debt was being deployed. In 11 states — including Andhra Pradesh, Punjab, Kerala, Tamil Nadu and West Bengal — capital spending was lower than net borrowings, implying that loans were being used to fund day-to-day expenses rather than asset creation. In Andhra Pradesh, capital outlay was only 17% of borrowings.
This violates the so-called “golden rule” of borrowing, which holds that debt should finance investment, not revenue deficits.
Deficits Widen
Twelve states breached the fiscal deficit ceiling of 3.5% of GSDP, with Assam (-6.3%), Bihar (-6%), Himachal Pradesh (-6.5%), Meghalaya (-6%), Punjab (-4.9%) and Sikkim (-4.5%) among the worst offenders.
While 16 states managed to post revenue surpluses, others, including Andhra Pradesh, Kerala, Punjab, Rajasthan and West Bengal, slipped into revenue deficits despite Finance Commission grants.
Apart from direct borrowings, states carried guarantees worth ₹10.1 trillion — 3.9% of combined GSDP — exposing them to contingent liabilities if state-run enterprises default.
Overall, the report paints a picture of uneven fiscal health: richer states such as Maharashtra, Gujarat and Karnataka have maintained relatively sustainable debt profiles, while heavily indebted states in the North and East are drifting further from the consolidation path. The risk, analysts warn, is that persistent reliance on borrowings for revenue spending could squeeze out future fiscal space for investment, deepen intergenerational debt burdens, and complicate macroeconomic stability.
