Indian States Successfully Managing Debt: A Study in Fiscal Discipline

Public debt is a crucial indicator of a state’s financial health. While most Indian states continue to see rising levels of borrowing, a few have demonstrated fiscal prudence by managing, stabilizing, or even improving their debt-to-GSDP ratios. In India’s federal structure, where states have significant spending responsibilities but limited revenue-generating powers, managing debt effectively requires a combination of strategic planning, robust revenue growth, and targeted expenditure.

This article explores how certain Indian states have successfully kept their debt under control and what lessons they offer for other states.

Understanding Debt-to-GSDP Ratio

Before diving into specific states, it’s important to understand what the debt-to-GSDP ratio means. It is the ratio of a state’s total debt to its gross state domestic product (GSDP). A lower ratio implies a healthier economy where debt levels are manageable compared to the size of the state’s economic output. The Fiscal Responsibility and Budget Management (FRBM) Act suggests keeping this ratio below 25% for long-term sustainability.

While most states carry some level of debt, those that maintain a steady or declining debt-to-GSDP ratio signal stronger economic governance.

Gujarat: A Model of Fiscal Prudence

Gujarat stands out as one of the most fiscally disciplined states in India. Its debt-to-GSDP ratio has consistently remained below the national average and was estimated to be around 17.5% in recent years. The state’s focus on industrial development, robust infrastructure, and investor-friendly policies have fueled economic growth. Gujarat’s thriving ports, manufacturing hubs, and renewable energy sectors contribute significantly to its revenue.

The state has also maintained a relatively lean bureaucracy and ensured better public sector efficiency. Public-private partnerships (PPPs) have reduced the financial burden on the exchequer while delivering large infrastructure projects on time.

Maharashtra: Stability Amidst High Absolute Debt

Maharashtra, India’s most industrialized state and home to Mumbai, contributes the highest share to the national GDP. Although its absolute debt is among the highest in the country due to the sheer size of its economy, its debt-to-GSDP ratio has been stable between 18% and 20%.

The state enjoys diversified sources of revenue, including GST, stamp duties, excise on alcohol, and professional taxes. Its ability to attract foreign direct investment (FDI) and maintain a growing services and manufacturing sector has enabled it to service its debt effectively without compromising capital expenditure.

Karnataka: Leveraging Technology for Fiscal Health

Karnataka, led by its strong IT and biotech sectors, has also shown commendable fiscal management. Its debt-to-GSDP ratio has remained around 20%, well within sustainable limits. Bengaluru, the state capital, is India’s technology hub, generating significant tax revenues through services, property registration, and consumption-based taxes.

Karnataka’s focus on digital governance, infrastructure, and education has paid dividends. With a disciplined approach to borrowing and efficient utilization of funds, Karnataka has avoided the trap of rising debt while still investing in development.

Telangana: A Turnaround in the Making

Telangana, India’s youngest state formed in 2014, initially saw a steep rise in debt due to heavy capital expenditure on irrigation, infrastructure, and welfare schemes. However, in recent budgets, the government has signaled a shift toward fiscal consolidation. Its debt-to-GSDP ratio, which peaked around 27%, has started to show signs of stabilization.

The state has improved its own tax revenue collection, particularly from excise duties, land sales, and property registrations. As economic activity rebounds and the government curbs excessive spending, Telangana is on a path to improve its fiscal metrics.

Tamil Nadu: Intent on Fiscal Reform

Tamil Nadu has traditionally carried a high debt burden, with its debt-to-GSDP ratio hovering around 26–28%. However, the state has shown a strong intent to reform in recent years. Budget presentations have highlighted efforts to reduce the revenue deficit, increase capital spending efficiency, and curb unproductive subsidies.

The state enjoys strong revenues from manufacturing, automobiles, electronics, and services. If these reforms continue and political consensus supports fiscal prudence, Tamil Nadu could see a gradual improvement in its debt situation.

Why Debt Control Matters

Excessive debt can severely constrain a state’s ability to invest in critical areas like infrastructure, education, and healthcare. Moreover, high debt servicing costs can lead to a vicious cycle of further borrowing just to pay interest, reducing financial autonomy.

States that manage their debt well are able to:

  • Maintain investor confidence
  • Receive better credit ratings
  • Attract more central and foreign assistance
  • Ensure sustainable development without fiscal stress

States Under Debt Stress

While some states have shown positive trends, others are under significant fiscal pressure. These include:

  • Punjab: Among the worst-hit with a debt-to-GSDP ratio nearing 47%. Its heavy subsidy burden, limited revenue base, and poor tax compliance have contributed to this crisis.
  • Kerala: High levels of welfare spending combined with low tax mobilization have pushed Kerala’s debt-to-GSDP ratio to around 40%.
  • West Bengal: Burdened by past liabilities and populist schemes, the state’s ratio remains around 36%.
  • Rajasthan and Bihar: Also face growing debt concerns due to high revenue deficits and inadequate economic expansion.

These states often rely on borrowing to meet day-to-day expenses, which is not a sustainable fiscal practice.

Lessons for Other States

The examples of Gujarat, Maharashtra, Karnataka, and to some extent Telangana and Tamil Nadu, offer valuable lessons:

  1. Diversify Revenue Sources: A broad tax base and sectoral diversity help cushion fiscal shocks.
  2. Invest in Growth-Oriented Sectors: States that support manufacturing, IT, and services see better economic expansion, which improves the debt ratio.
  3. Cap Unproductive Expenditure: Welfare schemes should be targeted and efficient. Leakages and non-targeted subsidies should be curbed.
  4. Transparent Budgeting: Public accountability and transparency in state finances build long-term trust and efficiency.

Conclusion

India’s fiscal future depends not only on the central government’s policies but also on how responsibly states manage their finances. While rising debt levels are a concern, several states have taken proactive steps to keep their fiscal house in order. By maintaining strong economic growth and curbing wasteful expenditure, states like Gujarat, Karnataka, and Maharashtra demonstrate that it is possible to balance development with fiscal discipline.

As India aspires to become a $5 trillion economy, strengthening state finances will be a critical pillar of that journey. With continued reforms, transparency, and strategic investments, more states can replicate the success stories of these fiscally sound states and contribute to national growth without falling into the debt trap.

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