Coin explanator | Why government debt can be India's next major fiscal problem

Copyright © HT Digital Streams Limit all rights reserved. Rhik Kundu 3 min Read 17 Sept 2025, 01:23 pm is the fiscal shortage data of the central government is the most visible and regularly reported because it indicates national fiscal policy, which directly affects the macro economic stability, inflation and the interest rate environment. (Pixabay) Summary This rising debt poses various risks: it can extract private and central loans in the bond market, undermine fiscal discipline, as populist subsidies take precedence over long-term goals and eventually contribute to macroeconomic instability. When fiscal deficit numbers in India make headlines, the focus is always on the Union government. Yet this myopic view looks from an important component of the country’s financial health: the states, which collectively make up a significant part of the total fiscal void. Mint looks at why the debt dynamics of the states are just as critical as the center. The mislooked debt burden of countries The true image of India’s debt is distorted by a persistent focus on the central government alone. The annual state loans, typically at 3-4% of GDP, compared to the center’s 4.8% in FY25. These figures are often underestimated by loans outside the budget, which darken the full extent of their obligations. The debt-to-GSDP ratios in some major state point, West Bengal and Himachal Pradesh-have already risen more than 40%and placed it in a fiscal position that corresponds to the highly emphasized national economies. This rising debt poses various risks: it can figure out private and central loans in the bond market, undermine fiscal discipline, as populist subsidies take precedence over long-term goals and eventually contribute to macroeconomic instability. Why the center gets the headlines, the fiscal shortage of the Union government has been reported the most visible and frequent because it indicates the national fiscal policy, which directly affects the macro economic stability, inflation and the interest rate environment. This focus is reinforced by international investors and sovereign rating agencies, which carefully monitor the fiscal targets of the center, such as the 4.4% goal for FY26. However, this spotlight often overshadows states’ equally important contribution to the guilt of the country. The true scope of India’s fiscal gap India’s consolidated fiscal fiscal shortage of government – the combined total for the center and all states – is the true scope of the fiscal vulnerability of the country. While the deficit of the union dominates dominance, states collectively represent almost a third of this total. For example, in FY25, the joint fiscal deficits swung about 2.7-3.2% of GDP in FY25, compared to the Union government’s 4.8% in FY25. This means that states contribute a significant 30-35% to the total fiscal gap, making it impossible to accurately assess the country’s credit rating without including it. What does the fiscal deficit and loans outside the budget drive for states? Important pressure on government finances stems from rising spending on social and development, poor revenue growth and cyclical slowdowns. With many countries very dependent on central transfers, they are exposed when the central policy shifts. To connect these gaps, they often use loans outside the budget via state enterprises. This practice hides the actual fiscal picture and creates hidden obligations. While the center and different financing commissions have claimed more transparency, the struggle for fiscal discipline continues. How are state and central fiscal deficits monitored? India limits fiscal deficits on both the central and state level through the framework for fiscal responsibility and budget management (FRBM). This Act determines statutory loan limits linked to a percentage of GDP for the center and the gross state’s domestic product (GSDP) for the states. In addition to the FRBM framework, there is a greater investigation into loans outside the budget. These are loans taken by state -owned enterprises or other entities that were not previously reflected in the state’s main budget. To improve transparency, many of these obligations have now been instructed to be recorded on the balance sheets. This step helps to give a more accurate image of the total debt of a state. “State loans are closely linked to how well states their fiscal deficits manage. Unlike the center, states under tighter limits work, as their fiscal deficit targets are authorized by a statute. Since states are directly responsible for nuclear development activities such as agriculture, health and education, their borrowing capacity is bound by fiscal available to them,” Madan Sabnavis, Chief Economist, or Baroda “with Revenues linked to Madan Sabnavis, Chief Economist at the Bank of Baroda” growth, slower GDP limits the income, which makes the management of expenses even more critical. Ultimately, the overall fiscal health and creditworthiness of India depends on the joint deficits of both the center and the states. It is this consolidated picture that is of utmost importance to maintaining macro -economic stability. Catch all the business news, market news, news reports and latest news updates on Live Mint. Download the Mint News app to get daily market updates. More Topics #Mint-Explainer #Fiscale Deficiency #Debt Read Next Story