Flashing red: The debt of Indian States continues to pile high

Political giveaways, resulting in sharp increase in revenue expenditure, not matched by commiserate increase in States’ own tax revenues, appear to be the prime reasons behind this growing debt pile.
| Photo Credit:
erhui1979

The Centre as well as the States had to increase their borrowings sharply due the additional spending during the Covid-19 pandemic, which took their fiscal deficits and cumulative debt to alarming proportions. But the subsequent recovery in the economy has helped rein in the deficits.

Now that the pandemic is behind us, businessline did an analysis of the borrowing of 15 of the largest States, based on GSDP ranks, to see where their debt stands. Numbers show that most of the larger States have budgeted for higher borrowing in FY26 and there is marked deterioration in the leverage ratios of the highly indebted States.

Approaching the market

Of the 15 States analysed, 12 have budgeted to increase the net market borrowing for FY26, when compared to the revised estimates for FY25.

Tamil Nadu had budgeted for the highest market borrowing for FY26 followed by other large States such as Maharashtra and Karnataka. States such as Madhya Pradesh, Rajasthan and Karnataka have recorded large growth in the net market borrowing for FY26, compared to budget estimate for FY25.

“All States need to borrow, and this trend has only intensified after Covid. Debt can only decline if States manage to control their fiscal deficits,” says Madan Sabnavis, Chief Economist at Bank of Baroda.

Odisha has recorded the highest, 73 per cent, jump in borrowing. But that is on a low base and therefore not a concern. In absolute terms, Odisha has budgeted for the lowest borrowing in FY26.

Above high-water mark

But a better way to judge if a State is over-leveraged is to view its debt against the size of its economy. The optimum debt to GSDP ratio for improving growth and savings in a State is pegged at 25 per cent.

But analysis of the debt to GSDP ratio of the 15 largest States reveals that debt levels are getting precariously high in many States including Bihar (52.3 per cent), Punjab (47.3 per cent), West Bengal (38.9 per cent) and Andhra Pradesh (35.1 per cent).

“Bihar is heavily dependent on Central government funds and has been maintaining higher expenditure growth than its receipts, resulting in high fiscal deficit, which is why its debt is also piling up, says Paras Jasrai, Associate Director, India Ratings & Research. “The State’s debt burden increased due to Covid-related expenditures in 2021 and stabilising it will take time.”

Jasrai adds that Punjab’s debt was high even before the pandemic. After the State elections, the new government announced higher power subsidies alongside other new schemes, increasing overall committed expenditure and further raising the debt. Challenges in nominal GSDP growth relative to the rate of interest have contributed to the rising debt burden for the State. 

Kerala, Uttar Pradesh and Madhya Pradesh also have debt to GSDP ratio above 30, while States such as Telangana, Tamil Nadu and Karnataka have managed to rein this ratio closer to the 25 per cent mark.

The States which score the best in this parameter are Odisha (debt to GSDP of 11.7 per cent), Gujarat (16.8 per cent), and Maharashtra (18.5 per cent). A healthy growth in the economies appears to be aiding these States.

Watch out for guarantees

The study on State Finances, published annually by the RBI, has repeatedly highlighted the risks posed by the guarantees given by State governments for loans taken by State public sector enterprises. These guarantees are not part of the State debt and create a contingent liability, which can cause problems to the State’s fiscal position in future.

Telangana has the highest outstanding guarantees as of February 2025 and the guarantees as a percentage of GDP amount to 14.9 per cent. The debt to GSDP ratio of Telangana will increase to 43 per cent if the guarantees were accounted for. Andhra Pradesh. Rajasthan, and Tamil Nadu are other states with large outstanding guarantees.

“The overall fiscal performance and the financial health of PSUs play a significant role in the rising guarantees. States like Andhra Pradesh, Telangana, Uttar Pradesh, and Rajasthan have loss making PSUs thus requiring State support and which is why their guarantee levels are also higher. Whereas States like Odisha and Gujarat, where the power sector is in a strong position, have lower guarantees as a result,” says Jasrai.

Is the cover adequate?

The main fallout of mounting debt is the increasing interest expenditure in the State Budgets. Finance costs are committed expenditure, which means that States must spend on them. As finance cost increases, other productive capital expenses may get sacrificed.

The other aspect with interest cost is whether States have adequate resources to fund the interest. This can be measured by interest cover, which is derived by dividing the revenue receipts by interest cost. The higher the interest cover, the better.

Odisha, not surprising, has the highest interest cover of 35.7 per cent according to the Budget estimate of FY26. Bihar, Madhya Pradesh, Telangana and Uttar Pradesh have interest cover between 10 per cent and 12 per cent, implying that they may not have much trouble paying interest on their debt.

Punjab, Tamil Nadu, Kerala and West Bengal have the lowest interest cover, between 4 per cent and 6 per cent, indicating that interest cost is biting a large chunk of the States’ revenue.

Finally

It’s not just the States, but the Centre too has seen a large spike in its debt after the pandemic; the Centre’ debt is at 56.2 per of GDP in FY25, above the FRBM dictated 40 per cent mark. But the Centre has laid a road map for bringing down the ratio to 50 per cent by 2031, as high level of government debt hurts investments and overall growth.

The States can also be asked to draw up similar strategies for containing the growth in debt, which is increasing at very fast rate in some States. This could help usher in greater fiscal discipline and tighter control over revenue expenditure.

Published on April 6, 2025

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