Being a federation, India allows its states to raise money to meet their financial requirements. By borrowing too much, however, excessive debt levels can affect the state’s economy and the overall health of its fiscal component. States’ Debt is high due to various reasons ranging from spending on infrastructure and social welfare schemes to fiscal mismanagement.
Top 10 Indian States among the highest in debt and their liability creation:
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Maharashtra
Maharashtra is the most industrialised but has the highest debt (in absolute terms) among Indian states. According to the latest reports, the state’s debt is now over ₹7 lakh crore. Some of the debt can be attributed to mega-infra projects like the Mumbai Metro, coastal road projects and investments in industrial zones. The pandemic also compounded its financial woes with higher healthcare and welfare costs. Despite its high debt, Maharashtra continues to earn good money through GST, excise, and other taxes.
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Uttar Pradesh
Uttar Pradesh is also the most indebted state in India, with a debt of around ₹6.5 lakh crore. Due to its high population, the state must spend a lot on healthcare, education, and welfare schemes. Farm loan waivers and public infrastructure expansion schemes increased debt levels. The state government has struggled to increase revenue through industrialisation and reforms related to taxation in the digital sector.
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West Bengal
West Bengal has an extensive history of heavy debt, with current liabilities nearing ₹5.5 lakh crore. Fiscal mismanagement and low revenue generation have been the defining factors for the state’s struggle to repay debts for decades. Debt repayment obligations, government expenditure on subsidies, and social schemes such as the ‘Kanyashree‘ and ‘Rupashree‘ schemes also account for a considerable portion of its financial fabric. Yet, despite efforts to attract investment, revenue has not been enough to counter increasing debt.
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Tamil Nadu
Tamil Nadu has a debt of around ₹5.7 lakh crore and is among the most indebted states in the country. The rising debt is also attributable to its high spending on welfare schemes, free electricity given to farmers, and other fees provisioned for public transport. Tamil Nadu is an industrial leader and an economic powerhouse, but its revenue is not always enough to meet its high expenditure commitments.
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Rajasthan
Rajasthan has accumulated a massive debt of ₹4.5 lakh crore. The state government has been investing heavily in social welfare schemes such as ‘Chiranjeevi Yojana’, which provides free medical insurance and waivers for farm loans. Rajasthan also has less industrialisation than other states, which means less revenue generation and more borrowing to sustain government schemes.
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Madhya Pradesh
Madhya Pradesh’s debt is more than ₹3.5 lakh crore. Much of this borrowing is due to spending on rural development, irrigation projects, and farmers’ subsidies. Although the state is working toward attracting investments and expanding industries, it has failed to match revenue mobilisation with increasing expenditures.
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Andhra Pradesh
Many populist schemes and infrastructure projects have now led Andhra Pradesh to more debt. The state’s debt has surpassed ₹4 lakh crore due to huge expenditures on welfare schemes like free electricity, pensions and housing for the poor. The separation of Andhra Pradesh and Telangana in 2014 further disrupted its economy and added to its debt burden.
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Karnataka
Karnataka, one of India’s fastest-growing states, has a debt burden close to ₹3.7 lakh crore. The state government has been laying the groundwork for outlays on infrastructure, education, and technology-fueled ventures. “The increasing debt was the result of loan repayments and subsidies for several schemes like ‘Anna Bhagya’, etc. While the IT sector and GST collections gave the much-needed revenue boost, the maximal fiscal deficit still looks worrying.
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Punjab
Punjab has one of the highest debt-to-GSDP ratios in India, with a total debt of over ₹3 lakh crore. The state’s high debt is due to years of providing free electricity to farmers, loan waivers, and pension commitments. Moreover, Punjab’s deep dependence on agriculture and meagre industrial diversification has led to lesser revenue generation, daunting the debt repayment process.
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Bihar
Bihar, a developing state, has a $2.8 lakh crore debt. The state’s rising debt is fueled by its spending on social programs, lack of industrialisation, and high dependence on central grants. Bihar’s initiatives to lure more industries into the state appear to be making an impact, but slower revenue growth and increased expenditures are putting pressure on its finances.
Reasons for High Debt in Indian States
There are some reasons for the rising debt levels of Indian states:
- Infrastructure Development: Most states borrow significantly for roads, metro rail, urban development, etc.
- Social Welfare Schemes: Free electricity, farm loan waivers, pension schemes, and subsidies take up a hefty chunk of state spending.
- Revenue Deficit: The states with low industrialisation and poor revenue collection find it difficult to generate enough income, leading to high borrowing.
- Pandemic Effect: COVID-19 triggered heightened health-related spending and economic slowdowns, adding to the debt burden in many states.
- Loan Repayments: Numerous states need to borrow more to repay current debts, which creates a vicious cycle of growing liabilities.
Implications of High Debt
High levels of debt can severely impact a state’s economy in many ways, including:
- Lack of money for crucial development projects
- Impact on future fiscal planning due to increased interest payments
- Greater risk of financial instability
- Reduced borrowing capacity due to lower credit ratings
Measures to Control Debt
To control the debt effectively, Indian states should:
- Better taxation policies to improve revenue collection
- Scrap unnecessary expenses and enhance welfare schemes
- Share attracts investments in the industry and economic growth.
- Have strict budget responsibility standards
Conclusion
The high debt of Indian states continues to be a significant economic stability challenge. Debt is often required for growth, but high debt-to-equity ratios and an inability to pay off debt can create financial distress. However, the states must concentrate on enacting sustainable welfare spending and economic policies to ensure they remain fiscally healthy over the long term. A financial plan with sound revenue generation and responsible borrowing is essential for managing state debt.
For a sustainable future, state governments must also ensure adherence to fiscal discipline and higher investments in revenue-generating sectors to control fiscal deficits. States can reduce their dependence on borrowing through measures to encourage industrial development, strengthen public-private partnerships, improve tax collection technology, etc. Pragmatic fiscal management can help states put themselves on a methodical trajectory towards economic growth and stability and balance developmental needs with financial sustainability.
