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India\u2019s Public Debt: Central Progress, State Concerns

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  Published in Business and Finance on Friday, January 30th 2026 at 9:30 GMT by ThePrint
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New Delhi, January 30th, 2026 - India's public debt situation, dramatically impacted by pandemic-era spending, is exhibiting signs of cautious optimism, according to an analysis of recent economic data and extending the findings of the Economic Survey 2024. While the central government demonstrates progress in stabilizing its debt burden through fiscal prudence, a widening gap in fiscal health at the state level continues to pose a significant challenge to India's long-term macroeconomic stability.

The Economic Survey 2024, initially released in early 2024, highlighted a crucial divergence in debt trajectories. The central government, benefiting from robust economic growth and improved revenue mobilization, managed to reduce its debt-to-GDP ratio from 50.9% in 2021-22 to 48.9% in 2022-23. This decline, achieved through expenditure rationalization and a focus on fiscal discipline, signals a positive trend. However, this positive momentum hasn't translated uniformly across the nation.

State governments, collectively, are facing a different reality. The survey revealed an increase in state debt as a percentage of GDP, rising from 26.3% to 28.1% over the same period. This divergence underscores a growing disparity in fiscal health, creating a two-tiered debt landscape within India. Preliminary data for 2023-24 and early 2024-25, analyzed for this report, suggests this trend continues, although the pace of increase may have slowed in some states.

Why the State Debt Problem?

Several factors contribute to the states' fiscal challenges. Many states rely heavily on transfers from the central government to finance their expenditures. While these transfers are vital, they create a dependency that limits fiscal autonomy. Furthermore, a significant portion of state revenue is derived from Goods and Services Tax (GST) compensation, which ended in June 2022. The loss of this guaranteed compensation has put additional strain on state finances.

Increased spending on social welfare programs, infrastructure projects, and, more recently, commitments related to climate change initiatives, further exacerbate the situation. While these are essential investments, their funding often relies on borrowing, contributing to the growing state debt.

Overall Public Debt - A Mixed Picture

The combined public debt - encompassing both central and state governments - stood at 81.9% of GDP in 2022-23, a slight improvement from 83.2% the previous year. However, this modest reduction is largely driven by the central government's efforts. The persistent rise in state debt continues to offset some of these gains, preventing a more substantial decline in the overall public debt ratio.

Recommendations and Future Outlook

The Economic Survey 2024 offered several recommendations for addressing the state debt issue. These include:

• Boosting Own Revenue: States should prioritize increasing their own tax and non-tax revenue sources. This may involve streamlining tax administration, leveraging local resources, and promoting economic activity within their jurisdictions.
• Expenditure Efficiency: Improving the efficiency of public spending is crucial. States need to identify and eliminate wasteful expenditures, prioritize essential programs, and adopt innovative approaches to service delivery.
• Structural Reforms: Undertaking structural reforms in areas such as power distribution, public sector enterprises, and land administration can enhance fiscal performance and attract investment.
• Fiscal Responsibility Legislation: Strengthening state-level fiscal responsibility legislation and ensuring adherence to fiscal targets can promote long-term sustainability.

Looking ahead, the sustainability of India's public debt hinges on concerted efforts at both the central and state levels. While the central government's commitment to fiscal consolidation is commendable, it must be complemented by equally robust fiscal management by the states. Without a coordinated approach, the risk of macroeconomic instability remains. Analysts predict that if state debt continues to rise at the current pace, it could become a significant drag on India's economic growth potential in the long run. The government is expected to announce further measures aimed at incentivizing fiscal discipline among states in the upcoming budget session of Parliament.