By Deepanshu Mohan, Aditi Lazarus and Geetaali Malhotra
A recent CAG report on state finances finds that whenever fiscal revenues fall short, Indian states tend to bridge the deficit gap with enhanced loans and utilised bonds, steadily adding to their public debt. This pattern has intensified in recent years, most dramatically during the pandemic, when collapsing revenues and emergency spending forced almost every state into record borrowing.
The data compiled by the Comptroller and Auditor General (CAG) in its State Finances 2022–23 confirm this divergence, showing that borrowing trends between 2016–17 and 2022–23 shifted in markedly different directions across states. Small states remain dependent on transfers, while big states rely more on their own resources and borrowing.
India’s fiscal map reveals a stark contrast between its larger and smaller states. At one end are the big states, defined by vast geographies and wide responsibilities. As per the The Ministry of Statistics and Implementation (2011) Rajasthan spans 342,239 sq km, larger than many countries, while Madhya Pradesh (308,252 sq km), Maharashtra (307,713 sq km) and Uttar Pradesh (240,928 sq km) are the other territorial heavyweights.
Their scale brings both opportunity and burden. With expansive, diverse economies, they anchor national growth and run large welfare systems, so their fiscal strategies reverberate nationally. Maharashtra generated nearly 70 per cent of its receipts internally in 2022–23, signalling strong revenue mobilisation, while other states depend on more volatile sources. Kerala’s lottery receipts approached Rs 12,000 crore. Economists warn that such tactics are like “paying rent by selling family heirlooms,” highlighting the limits of one-off revenues.
At the other end are the small states (Arunachal Pradesh, Assam, Goa, Himachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, and Uttarakhand), whose fiscal realities are shaped as much by geography as by size. Himachal Pradesh (55,673 sq km), Uttarakhand (53,483 sq km), Meghalaya (22,429 sq km) and Sikkim (7,096 sq km) operate on constrained canvases.
Goa, the tiny coastal state at just 3,702 sq km, represents the most compact example. Mountainous terrain, dispersed settlements and narrow economic bases raise delivery costs and limit revenue mobilisation in most small states.
In 2022–23, Uttarakhand reported an own-tax share of 34.8 per cent of receipts while Arunachal managed only 9.4 per cent; most northeastern states remain below 20 per cent, confirming reliance on Union transfers. Their fiscal base may be modest, but their responsibilities are no lighter, making choices especially sensitive to geography and capacity.
With narrow tax bases and high delivery costs, modest increases in borrowing can push the debt-to-GSDP ratios of smaller states to levels that would be unremarkable in larger states but alarming here.
Assam illustrates this tension. Borrowings rose steadily from Rs 3,902 crore in 2016-17 to Rs 28,270 crore in 2022-23, pushing its liabilities to around 28.5 per cent of GSDP in 2023. Himachal Pradesh followed a similar trajectory, climbing from Rs 8,603 crore to Rs 22,372 crore, with debt levels persistently high, hovering near 43-44 per cent of GSDP. Manipur and Meghalaya, though smaller in rupee terms, also expanded to Rs 11,116 crore and Rs 6,221 crore by 2022–23, respectively.
By contrast, Goa reduced borrowing sharply from a pandemic peak of Rs 7,655 crore (2020-21) to Rs 2,628 crore (2022-23), keeping debt below 30 per cent of GSDP. Tripura shrank even further to Rs 877 crore, though its ratio stayed above 30 per cent given its small economy. Nagaland and Uttarakhand also scaled back post-2020, yet their debt burdens remained high at roughly 45-47 per cent and 34 per cent.
Between 2016–17 and 2022–23, the differences across states were striking. Andhra Pradesh exemplifies sustained expansion, rising from Rs 59,923 crore in 2016–17 to Rs 1,86,024 crore in 2022–23, with liabilities around 33.1 per cent of GSDP. Rajasthan followed a similar path, climbing to Rs 1,60,565 crore with a debt ratio of 37.3 per cent, while Telangana expanded steadily to Rs 1,26,884 crore, though its liability ratio remained a more moderate 26.2 per cent. Other states retrenched after the pandemic peak. Maharashtra spiked to Rs 1,18,516 crore in 2020–21 but scaled back to Rs 94,702 crore, holding its liabilities near 18.1 per cent thanks to its broad GSDP.
Two outliers stand out. Odisha cut borrowings to just Rs 5,347 crore with a debt ratio of 19.5 per cent, reflecting revenue windfalls and deliberate restraint. Punjab, by contrast, combined volatile borrowings with persistently high liabilities near 47.1 per cent, highlighting chronic stress.
Whether expansive like Maharashtra or compact like Meghalaya, states face a common dilemma: Their welfare ambitions consistently outstrip their fiscal means. Borrowing patterns may diverge across size and scale, but the underlying paradox is the same: Fiscal fragility coexists with an ever-expanding welfare state.
On paper, many states show balanced or even surplus positions. In practice, they lean heavily on central transfers, off-budget loans, and deferred liabilities. Punjab embodies chronic stress with debt locked at unsustainable levels; Kerala depends disproportionately on lottery sales; Andhra Pradesh and Uttar Pradesh bankroll expansive farm waivers and free power through guarantees and special purpose vehicles that push costs into the shadows of state accounts.
India has built one of the world’s most expansive welfare systems, but it rests on one of the most fragile fiscal foundations. The outcome is a state of extraordinary reach but constrained capacity, a spectacle of care balanced precariously on the edge of scarcity.
Mohan is professor of Economics and dean, O P Jindal Global University and visiting professor at London School of Economics and a research fellow, AMES, University of Oxford. Lazarus and Malhotra are research analysts with Centre for New Economics Studies (CNES), O P Jindal Global University
