Why Populism Is Threatening India’s Financial Future?

The Alarming Rise of Debt-to-GDP Ratio in Indian States: Why Supreme Court Intervention is Critical

The debt-to-GDP ratio (or debt-to-GSDP ratio in the case of states) is a critical indicator that reveals the financial health of a state by comparing its total outstanding debt to its economic output. In recent years, Indian states have witnessed a steady rise in their debt levels, raising serious concerns about fiscal sustainability, efficient governance, and economic stability. As debt levels spiral out of control in several states, this issue has reached an alarming point where intervention from the Supreme Court of India may become necessary to prevent financial instability from derailing India’s economic progress.

In this article, we will explore the debt-to-GDP ratios of all Indian states, highlight why this rise is alarming, and discuss why the Supreme Court may need to step in to impose stricter fiscal discipline and transparency.

Debt-to-GDP Ratios of Indian States: An Overview

The debt-to-GDP ratio of Indian states is a reflection of how much debt they have accumulated in relation to their economic output. While borrowing can be necessary for growth, states that rely too heavily on debt run the risk of creating a fiscal burden for future generations. Below is a snapshot of the debt-to-GDP ratios of various Indian states, highlighting states with both high and low debt levels.

High Debt-to-GDP Ratio States (Above 35%)

1. Punjab (48-50%): Punjab has one of the highest debt-to-GDP ratios in the country. The state’s heavy reliance on borrowing, driven by expensive subsidies like free electricity to farmers, loan waivers, and populist schemes, has pushed it into a debt trap. Punjab’s fiscal mismanagement is one of the worst in the country.
2. Himachal Pradesh (45-47%): The state’s high debt burden stems from excessive spending on social welfare schemes and rising pension liabilities. Tourism, its primary revenue generator, cannot sustain such debt levels.
3. West Bengal (38-40%): West Bengal has long struggled with a bloated bureaucracy and massive social welfare spending. Over-reliance on debt to finance populist policies has worsened its fiscal health.
4. Kerala (37-40%): Despite being one of the most literate states, Kerala’s mounting debt is a result of high public spending on welfare schemes and pension liabilities for its large government workforce.
5. Rajasthan (39-41%): Rajasthan’s high debt ratio can be attributed to its numerous subsidies, free electricity for farmers, and increasing pension payouts. This has pushed the state into serious fiscal stress.
6. Bihar (34-36%): Bihar’s low revenue collection due to a weak industrial base has forced it to rely on borrowing. Poor public infrastructure and social welfare schemes have further worsened the situation.
7. Uttarakhand (36-38%): Like Himachal Pradesh, Uttarakhand faces similar issues due to its large public sector workforce and social welfare schemes.

Moderate Debt-to-GDP Ratio States (Between 25-35%)

1. Telangana (30-32%): The state has been on a borrowing spree since its formation, largely to fund infrastructure and welfare schemes. However, its growing debt is a point of concern.
2. Karnataka (27-28%): Although Karnataka has been a strong performer in terms of economic growth, its debt level is rising due to increased public sector spending and fiscal deficits. Inefficient public spending and rising welfare schemes are adding to the problem.
3. Madhya Pradesh (26-28%): Madhya Pradesh is another state that has been grappling with fiscal challenges. Public debt is rising due to inadequate revenue growth and high expenditure on welfare programs.
4. Tamil Nadu (27-29%): Despite being one of the largest state economies, Tamil Nadu’s debt has been increasing due to extensive welfare schemes, subsidies, and public spending on infrastructure projects.
5. Assam (22-24%): Assam’s debt burden is lower compared to other northeastern states but is increasing rapidly due to expenditure on infrastructure, education, and social welfare.

Low Debt-to-GDP Ratio States (Below 25%)

1. Odisha (16-18%): Odisha is one of the better-managed states in terms of fiscal discipline. Its strong revenue collection and prudent fiscal policies have kept its debt-to-GDP ratio relatively low.
2. Gujarat (20-22%): Gujarat has maintained strong fiscal discipline, and its debt burden is among the lowest in the country, despite being one of the most industrialized states.
3. Maharashtra (20-22%): Maharashtra, India’s largest state economy, has managed its debt levels well, though recent increases in public spending have raised concerns.

Why the Rising Debt-to-GDP Ratios are Alarming

The steep rise in debt-to-GDP ratios across Indian states is alarming for several reasons:

1. Debt Servicing Burden

A high debt-to-GDP ratio translates into a growing burden of debt servicing. States with heavy debt must allocate a significant portion of their annual budgets to interest payments and loan repayments, leaving little for capital investment in critical sectors like healthcare, education, and infrastructure. For states like Punjab, which already allocates more than half of its budget to debt servicing, this can lead to a vicious cycle of borrowing more to pay off past debt, leaving future generations with a growing fiscal burden.

2. Crowding Out Productive Expenditure

When states prioritize debt repayment, they are forced to reduce spending on productive activities such as infrastructure development, public healthcare, and education. This slows economic growth and hampers job creation. For example, in states like West Bengal and Kerala, high debt servicing costs have already led to reduced investments in essential public services.

3. Risk of Downgrades in Credit Ratings

States with high debt-to-GDP ratios run the risk of downgrades in their credit ratings by financial institutions. This would make future borrowing more expensive, creating further financial stress. If investor confidence erodes, states could find it difficult to secure affordable financing, which would limit their ability to invest in growth-oriented projects.

4. Populist Spending

Many states are caught in the trap of populist spending, announcing loan waivers, free electricity, and other benefits during elections without considering their long-term fiscal impact. Such policies, while politically expedient, worsen the financial condition of states. In the absence of adequate revenue generation, states turn to borrowing, which increases their debt-to-GDP ratios further.

5. Impact on Future Generations

Borrowing beyond sustainable levels shifts the fiscal burden to future generations. Younger generations may have to bear the brunt of higher taxes and reduced public services as states struggle to manage their finances. This undermines the principles of intergenerational equity and fiscal responsibility.

Why the Supreme Court Must Intervene

The rising debt levels among Indian states are not just a matter of economic concern but could potentially destabilize the federal structure of the country. Here’s why the Supreme Court’s intervention may become necessary:

1. Constitutional Responsibility

The Indian Constitution, under Article 293, allows states to borrow but mandates that borrowing should be within the limits set by the state’s financial capabilities. Many states, however, are breaching these limits, leading to fiscal irresponsibility. The Supreme Court could enforce stricter interpretations of Article 293 to ensure that states do not exceed their borrowing limits irresponsibly.

2. Fiscal Federalism

The growing fiscal imbalance between states with high debt and those with low debt threatens India’s federal structure. States with heavy debt could demand more financial assistance from the central government, leading to imbalances in how resources are allocated. The Supreme Court could ensure that fiscal federalism remains balanced by imposing strict guidelines on borrowing and spending.

3. Judicial Review of Populist Policies

The Supreme Court could play a critical role in reviewing populist policies that put undue pressure on state finances. Judicial review could help curb irrational spending on schemes that may win elections but destroy long-term fiscal health. The Court could also ensure that states are transparent in how they fund such schemes and that adequate financial planning is in place before these policies are announced.

4. Preventing Future Fiscal Crises

Unchecked borrowing by states could lead to future fiscal crises, not unlike the debt crises experienced by many countries around the world. Supreme Court intervention at this stage could prevent such a scenario from unfolding, ensuring that states are held accountable for their borrowing and spending.

Conclusion

The rising debt-to-GDP ratios in Indian states are a cause for concern, and without immediate corrective measures, the situation could spiral into a fiscal crisis. States must exercise greater fiscal responsibility, and the Supreme Court of India can play a critical role in enforcing accountability and transparency. By stepping in to impose stricter borrowing limits, curb populist spending, and ensure that debt is managed responsibly, the Court can help safeguard the economic future of the nation and its people.