Beginning in the 2026-27 financial year, the Union government is shifting towards the debt-to-GDP ratio becoming the “fiscal anchor”, with a target to reduce it and keep it between 49% and 51% by 2031.
In 2018, under the Fiscal Responsibility and Budget Management (FRBM) Act, the government set the debt-to-GDP ratio targets at 40% for the Centre and 20% for the states by 2024-25. However, government data shows that all but four states have seen their debt-to-GDP ratio decline over the last decade, and that despite declines since the Covid-19 pandemic, neither the Centre nor the states are close to hitting the 2018 targets.
A study published by the National Council of Applied Economic Research (NCAER) found that most states are struggling to keep their debt-to-GDP ratios in check. The study is available on a NITI Aayog-NCAER website that Union Finance Minister Nirmala Sitharaman launched on April 2.
Debt-to-GDP ratio over the years
In 2003, when Parliament cleared the FRBM Act — the Atal Bihari Vajpayee-led NDA government was in power at the time — India’s general government debt — the combined outstanding liabilities of the Centre and states — stood at 83.23% of the national GDP. While the Centre’s debt-to-GDP ratio was 65.98%, the combined figure for the states was 31.79%.
According to Reserve Bank of India (RBI) data, it was the highest on record at the time. The FRBM Act came into effect on the back of a decade of rising debt-to-GDP ratios.
Chart: General government debt as a share of GDP.
Under the Congress-led UPA, the debt-to-GDP ratio consistently declined, falling to as low as 65.6% in 2010-11, with 52.16% of the debt attributed to the Centre and the remaining 23.5% to the states.
In 2013-14, just before the Congress lost power, the debt-to-GDP ratio stood at 67.06% — 52.16% for the Centre and 22% for the states. But from 2014-’15 onwards, the debt-to-GDP ratio rose annually. By 2019-20, the ratio was up to 75.46%, of which the Centre accounted for 52.82% and the states 26.65%.
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In 2020-21, there was a sharp spike to 89.45% owing to the added expenses after the outbreak of the Covid-19 pandemic. The ratio fell to 81.59% in 2023-24, with the Centre contributing 57.45% and the states 27.61%.
Centre’s projected debt
As far as the Centre goes, using the debt-to-GDP ratio as a fiscal target is a “more reliable measure of fiscal performance as it captures the cumulative effects of past and current fiscal decisions”, the government said in February.
The government has, as a result, projected declining debt-to-GDP ratios in three scenarios of “fiscal consolidation” — mild, moderate and high — linked to varying nominal growth rates of 10%, 10.5% and 11%.
If the growth rate is assumed to be 10%, the Centre’s debt-to-GDP ratio is projected to drop to 52% in the mild scenario, 50.6% in the moderate scenario, and 49.3% in the high scenario by 2030-31. At a growth rate of 10.5%, the ratio is expected to drop to 51% (mild), 49.7% (moderate), and 48.4% (high) by 2030-31. At a growth rate of 11%, the ratio could drop to 50.1% (mild), 48.8% (moderate) and 47.5% (high) by 2030-31.
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In each of these scenarios, the debt-to-GDP ratio is projected to hit the target set earlier this year, but would still fall short of the 40% target set in 2018.
How states have managed debt
Of the 21 major states that the NCAER study analysed, 17 have seen their debt-to-GDP ratios rise between 2012-13 and 2022-23. States not only account for almost a third of all public debt but also were responsible for more than half the increase in all public debt from 2014-15 to 2019-20, and a third of the increase in public debt from the pandemic years.
The NCAER split the states into three groups based on high, medium, and low increases in debt over the last decade. While Punjab (46.8%), Himachal Pradesh (45.2%), and Bihar (39.1%) had the highest debt-to-GDP ratios in 2022-23, the states that saw the highest increases in this ratio since 2012-13 are Punjab (15.8 percentage points), Tamil Nadu (13.5 pp), and Telangana (12.6 pp).
Map: State-wise debt-to-GDP ratios in 2022-23.
“States in the ‘high’ group spend a large proportion of their revenues on committed expenditures such as wages, salaries, pensions, subsidies, and interest payments. Such expenditure is higher for these states by 1.4 percentage points of GSDP. Committed expenditure accounts for a full 67% of their total revenue receipts, compared to 54% for the remaining states,” the report said, adding that a “sub-optimal composition” of expenditure, rather than low revenues, is largely to blame for the rising debts in these states.
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On the other end of the spectrum are Odisha (17.2%), Maharashtra (18.5%), and Gujarat (18.9%). These states are also among the four that have seen their ratios drop over the past decade: by 1.5, 0.8, and 4.5 percentage points, respectively. The only other state whose ratio fell between 2012-13 and 2022-23 is West Bengal. Its 39% debt-to-GDP ratio is 1 pp lower than it was a decade earlier.
Using past growth rates, the NCAER also projected the future trajectory of states’ debt-to-GDP ratios. By 2027-28, Punjab (53.7%), Himachal Pradesh (47.6%), Rajasthan (42.9%), Bihar (41.8%), and Kerala (41.3%) are projected to have the highest debt-to-GDP ratios.
Map: Projected state-wise debt-to-GDP ratios in 2027-28.
Between 2022-23 and 2027-28, Punjab (6.9 pp), Rajasthan (6.3 pp), Telangana (5.8 pp), Haryana (5.4 pp), and Chhattisgarh (4.5 pp) are projected to see the highest increases in their debt-to-GDP ratios. In the same period, only four states have recorded declines: Uttar Pradesh (2 pp), Gujarat (2 pp), West Bengal (1.2 pp), and Odisha (1.1 pp).
“The growth prospects of heavily indebted states are likely to remain impaired; the need to transfer federal resources to them will continue; and there will be adverse implications for prudent states, which will be effectively subsidising states with heavier debt burdens,” the report said.
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Last December, the RBI, in a study on state finances, raised concerns about a sharp rise in expenditure on various subsidies. “An area of incipient stress is the sharp rise in expenditure on subsidies, driven by farm loan waivers, free/subsidised services (like electricity to agriculture and households, transport, gas cylinder) and cash transfers to farmers, youth and women. States need to contain and rationalise their subsidy outgoes, so that such spending does not crowd out more productive expenditure,” it said.