Introduction

India’s federal system depends heavily on States for delivering core welfare, infrastructure, and development. For much of the 2000s, reforms and tax buoyancy allowed States to report surpluses, better spending, and healthier balance sheets. However, the COVID-19 pandemic marked a turning point: revenues plummeted while emergency spending skyrocketed, forcing States into unprecedented borrowing. The Comptroller and Auditor General (CAG)’s decade-long analysis highlights this transition, exposing systemic stress points in India’s fiscal federalism.

Why is this issue in the news?

India’s States, once showing signs of fiscal prudence with even surpluses, now find themselves trapped in a debt spiral. The pandemic alone pushed almost every State into record borrowing, reversing earlier trends. For example, Uttar Pradesh, once lauded for surplus budgets, reported a revenue surplus of only ₹2,000 crore, down sharply from ₹37,000 crore in FY20. Kerala, which borrowed ₹80,575 crore in 2020-22, saw its debt mount to unsustainable levels. The contrast is stark: States that earlier prospered through buoyancy and reforms are today weighed down by heavy fiscal deficits and repayment burdens.

How has the States’ borrowing changed over time?

1. Sharp rise post-pandemic: Borrowings spiked everywhere during the pandemic, with Kerala, Maharashtra, Andhra Pradesh, and Tamil Nadu reporting unprecedented debt levels.
2. Uttar Pradesh’s decline: From a revenue surplus of ₹37,000 crore in 2019-20, UP fell to only ₹2,000 crore.
3. Kerala’s crisis: Borrowed ₹80,575 crore between 2020-22 and exceeded ₹1.04 lakh crore later, making it one of the most indebted States.
4. National trends: From 2017 to 2022-23, States’ gross borrowings rose from ₹5.6 lakh crore to ₹8.2 lakh crore, reflecting widespread fiscal strain.

Why are States borrowing so heavily?

1. Emergency spending: The pandemic forced huge expenditures on health, welfare, and relief, while revenues collapsed.
2. Welfare paradox: Despite borrowing, States continue with high welfare commitments such as free electricity, pensions, and subsidies.
3. GST regime pressures: Dependence on GST compensation and delayed transfers added strain to State finances.
4. Capital expenditure trade-offs: More money went into welfare subsidies than infrastructure, raising concerns of long-term growth stagnation.

What are the fiscal risks emerging?

1. Debt sustainability: States like Punjab, Kerala, and Rajasthan carry some of the heaviest debt burdens relative to GSDP.
2. Revenue shortfall: Weak own-tax revenues coupled with GST dependency reduce fiscal space.
3. Deficit pressures: Gross fiscal deficit (GFD) levels remain elevated, restricting maneuverability.
4. Crowding out growth: Excessive borrowing for subsidies diverts funds from capital creation, weakening long-term competitiveness.

How are States coping with fiscal pressures?

1. Raising borrowings: Kerala, Maharashtra, and Tamil Nadu remain among the largest borrowers.
2. Cutting investments: Many States reduced capital expenditure to fund populist schemes.
3. Seeking Centre’s support: GST compensation and Union transfers remain critical lifelines.
4. Relying on lotteries and land: Kerala and other States turn to non-tax sources like lottery revenues or land monetisation.

What is the way forward for States’ fiscal health?

1. Prudent fiscal management: Focus on long-term debt sustainability instead of short-term populism.
2. Rationalised welfare: Targeted subsidies over blanket schemes to avoid unsustainable fiscal stress.
3. Strengthened GST framework: Ensure timely compensation and greater autonomy in tax mobilisation.
4. Balanced expenditure: Redirect focus toward capital creation and infrastructure while safeguarding essential welfare.

Conclusion

The macro-fiscal health of Indian States has reached a critical juncture. The transition from buoyancy and surpluses in the 2000s to widespread borrowing and debt stress post-pandemic illustrates both structural vulnerabilities and political compulsions. While welfare commitments reflect democratic imperatives, unchecked populism coupled with weak revenue growth risks undermining fiscal stability. The future of India’s growth story rests not only on the Centre but equally on how States recalibrate their spending priorities and borrowing practices.

PYQ Relevance

[UPSC 2024] Examine the pattern and trend of public expenditure on social services in the post-reforms period in India. To what extent this has been in consonance with achieving the objective of inclusive growth?

Linkage: The article’s discussion on States’ rising welfare spending, shrinking capital outlays, and mounting debt post-pandemic directly links to this PYQ by questioning whether such expenditure patterns genuinely advance inclusive growth.

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