How Indian States Can Prioritise Welfare Spending While Tackling High Debts

Most states recording higher deficits have done well in ensuring better access to social, economic and public goods while others like Gujarat, have cut down on essential welfare spending.

The 2024 Lok Sabha elections may be a year away but still, much of the political economy discourse on which state populations may prefer to vote for which party is already underway with the incumbent BJP contesting against Congress along with a potential national-opposition alliance (with or without Congress). 

Key economic issues likely to matter now or in the near future, before we get into the heat of the election season, may have a close bearing on the Union government’s own macro-fiscal position

Given how inconsequential economic actions taken by the Modi Government have been, one of the authors recently argued how a culture of adhocism has been instituted in the Union government’s economic policy decision-making, including those undertaken by a compromised central bank. We may also continue to observe more of ‘knee-jerk’ economics given the nature of fiscal insecurities faced by this government, and take into consideration its own dismal record of failing to meet the outlayed budgetary promises.

What about the states?

The Centre for New Economics Studies (CNES) InfoSphere team recently conducted a fiscal-risk analysis for all states across India, particularly assessing the case record of those states who have a higher fiscal deficit than others. 

There has been a troubled relationship between the observed proportion of ‘welfare spending’ made from state-revenue expenditure levels and the ‘revenue-growth’ performance levels of certain states, running a higher deficit – accruing more debt (via excessive borrowings). 

A lot of this debate has remained politicised by the current Union government, which is weaponising fiscal transfers to non-BJP state governments. There is also evidence that the Union government is also fiscally squeezing some states by holding up transfer payments or reducing their capacity to ‘borrow’ which is constitutionally problematic. 

The Modi government is also politicising fiscal data by insinuating divergent trends (between welfare spending and fiscal deficit) to accuse certain parties of ‘revdi culture

There is a conceptual and empirical fallacy here that needs to be highlighted. As one of the authors has repeatedly argued in the past, there is a clear need to distinguish between state governments’ spending on essential welfare needs, for which they are constitutionally responsible, and disbursements with unnecessary fiscal spends or borrowings that otherwise add to a high borrowing-debt burden. 

Most states recording higher deficits have also done well in ensuring better access to social, economic and public goods, while others (like Gujarat), have cut down on essential welfare spending and revenue expenditure just to keep more fiscal space for capex spending needs. 

The RBI, however, did a macro-fiscal analysis of state budgets (ex post the Sri Lanka economic crisis) where it brought some of these facts to light for all states across India. 

A common concern: high debt interest payments

Source: Infosphere

The graph above depicts the nature of interest rate payments to revenue receipts percentages for some of the states in the year 2021-22. 

As evident from the graph, states like Punjab, Haryana, Tamil Nadu, and West Bengal had high percentages of interest payment (all in more than 20%), which indicates that these states are spending a large portion of their revenue expenditure interest payments, indicative of a heavy debt burden induced by greater borrowing. 

Coincidentally, in some of the states – particularly, Punjab, West Bengal, Tamil Nadu, and Kerala – where the proportionate share in the devolution of funds received from the Centre have remained constantly low, you see the states being cornered into borrowing more to finance their revenue expenditure needs. 

On the other hand, states like Odisha are faring well which may be on account of better fiscal planning and expenditure to reduce liabilities and increase the assets of the state. The debt-to-GDP ratio of many Indian states is expected to increase significantly by the financial year 2026-27

The fiscal deterioration of states can be attributed to some of the following analytical issues observed in our study:

  1. Declining tax revenue: Revenue collected through tax has been falling in many Indian states and is extremely volatile.
  2. High Revenue Expenditure: The fiscally poor performing states have extremely high revenue expenditure out of their total expenditure. Expenditure on revenue accounts has resulted in high revenue spending to capital outlay ratios across such states.
  3. High Committed Expenditure: Expenditure on  (debt) interest payments and administrative expenses make up a  large portion of most states’ spending, leaving minimal fiscal opportunities to undertake developmental expenditure and focus on revenue growth expansion.
  4. External circumstances: Considering the increased spending during the COVID-19 pandemic and the rise of oil prices due to the Russia-Ukraine war, states across India have suffered due to higher expenditure and lower revenue generation, worsening many states’ fiscal imbalance.

Source: Infosphere

The graph above shows a change in the debt levels of the Gross State Domestic Product (GSDP levels) of states from the year 2019-20 to a projected analysis of debt-GDP ratios seen up until 2026-27. 

As can be seen from the projected statistics for 2026-27, most states are likely to see a rise in debt levels based on current trends except a few that have adopted better fiscal policies and financial estimates. 

The direct consequences of a widening debt-to-GDP ratio will adversely impact a state’s ability to raise revenues and push them into a vicious cycle of large debt, imposing greater pressure on the states’ revenue generation capabilities in creating new assets for the growth-development of the state.

Our InfoSphere team at CNES further identified a select number of states in India to undertake a more extensive fiscal-risk analysis of these based on the current numbers. 


On Growth:

The state recovered quickly post the pandemic because of higher GSDP performance due to better ‘service-led’ growth. Services account for the highest share of Karnataka’s Gross State Value Added (GSVA) at 64% followed by industries (21%) and agriculture (15%). See the Figure below sourced from here.

Over the last three to four years, the growth has remained volatile for the state’s agriculture and manufacturing sector, with most revenue income earned from services alone. The State is also leading the surge in services exports in the country as it occupies the top rank in software/ service exports and fourth in merchandise exports. During FY23, the share of Karnataka’s GSDP in India’s GDP stood at 8.2%. 

The newly elected Congress government must continue to ensure a higher growth trajectory in ‘services’ while developing economic opportunities in other areas (from agriculture to industry) that will help the government in also providing enough fiscal space for the implementation and expansion of an eroded social welfare/safety net. 

Monitoring Fiscal Deficit and Expanding the Tax Revenue Base

Most states in India, post-pandemic, have been struggling in managing high fiscal deficit levels. See the expenditure sheet from the Karnataka state budget documents from 2022-23 sourced from here.

Source: PRS

Out of the total expenditure, around 7% of budgeted spending in the 2022-23 budget was towards the welfare of SC, ST, OBC, and Minorities, by the Bommai-BJP government. With the 5 schemes announced by the newly elected Congress government, this sectoral spending share is now likely to go up, along with the meagre spending allocation made earlier towards energy, transport, social welfare and nutrition. 

Note: Only 2% of budgetary allocation was spent on this till 2022-23 with negative spending growth seen in areas of energy (-1%), transport (-1%), rural development (-1%), health and family welfare (-2%).

As with other States, Karnataka’s finances were affected by the pandemic with a dwindling revenue and a spike in healthcare expenditure. From 2.37%of GSDP in FY18, the State’s fiscal deficit increased to 3.03% in FY21. However, the State has since then been controlling the fiscal deficit’s rise by attempting to contain the revenue deficit largely by cutting social welfare spending.

What about revenue?

 Total revenue receipts for 2022-23 were estimated to be Rs 1,89,888 crore, a marginal increase over the revised estimate for 2021-22. Of this, Rs 1,37,824 crore (73%) were raised by the state through its own resources, and Rs 52,064 crore (27%) came from the centre. 

One isn’t sure now, how a ‘BJP’ run Union government will allocate ‘grants in aid’ or other centre-based spending towards the Karnataka state government that is now Congress-run because of the Centre’s tendency to hold essential funds from non-BJP governments.  

It is also vital to recognize how the growth of software services in recent years has helped Karnataka record a strong growth in tax revenue while the consumption of premium goods and services in urban areas has boosted its GST revenue as well. This is where the growth strategy of the new government will hold the key.

On fiscal deficit, in FY23, the State managed to reduce its fiscal deficit by Rs 8,703 crores compared with the previous fiscal year. Consequently, it revised the fiscal deficit to 2.8% of GSDP for FY23 against budget estimates of 2.82%. For FY24, the state has projected a fiscal deficit of Rs 60,581 crore or 2.6% of GSDP, well below the 4% cap allowed by the Finance Commission.

Keeping the macro-health of the state’s economic position in good shape will therefore be pivotal for the new Congress government in Karnataka to achieve its intended goals and pre-poll promises of social welfare and the 5 guarantees for all communities across the state. 


Punjab has been facing a huge debt burden due to the accumulation of unpaid loans and the debt burden cost of spending on various welfare schemes. 

The state government had to take drastic measures to cut spending and raise revenues, including increasing taxes and reducing subsidies. The fiscal crisis in Punjab has had a significant impact on the state’s economy along with rising unemployment, social unrest, and a decline in (per capita) living standards for people.

According to the 2022-23 budget, the total expenditure of the state is much higher than the revenue receipts. Moreover, the state’s fiscal health remains debt-ridden, with a fiscal deficit of 23,835 crores, and in such a situation would require further loans to meet the balance expenditures. 

The continuing fiscal challenges are on account of poor tax collection, high levels of corruption, mismanagement of public funds, dependence on agriculture and small industrial sector, subsidies, welfare schemes and unemployment.

Source: Infosphere

According to the 2021-22 budget, the total liability of Punjab stood at approximately Rs. 2.82 lakh crore ($38 billion USD). This includes both internal and external debt. In 2021, Punjab’s internal debt was approximately Rs. 1.84 lakh crore ($25 billion USD), while its external debt was approximately Rs. 98,000 crore ($13 billion USD). 

The state government is primarily responsible for changing its budgetary strategy to increase revenue income through progressive tax regimes. Borrowing may only be suitable for capital spending-related investments where the rate of return on investment (ROI) can help subside the cost of borrowing. Increasing revenue for the state’s management of the Fisc may be one of the most sensible options for addressing the imbalances observable in the numbers here.

Andra Pradesh

The debt-ridden state is currently encumbered with contingent liabilities that have exceeded 5% of GSDP. Furthermore, the state government remains callous in its fiscal management of resources by failing to contribute to the debt burden for the past three years, which results in a 3000-crore rupee upside.

  • According to a recent report by the Reserve Bank of India (RBI), the state’s outstanding debts stand at Rs 3.98 lakh crore. Its debt to GSDP ratio stands at 37.6%, the fourth highest among the states.
  • According to the Comptroller and Auditor General (CAG) statistics last year, Andhra Pradesh had a debt burden of Rs 3.37 lakh crore. It also revealed that during 2020-21, the state borrowed Rs 9,226 crore an average per month, mainly to pay salaries, pensions and foot the subsidy bill. The same trend is believed to have continued during 2021-22.

The continuing fiscal challenges in the state may be on account of direct dependence on the central government’s transfers, increasing revenue-expenditure gap, large-scale borrowing and poor tax compliance.

Source: Infosphere

Andhra Pradesh’s debt, at the time of bifurcation in 2014, was Rs 97,000 crore. In five years it jumped to nearly Rs 2.59 lakh crore. The YSR Congress government, which came to power in May 2019, borrowed another Rs 1.40 lakh crore from banks and other sources. The situation has reached a stage where there are fears that the state may require to raise loans even for debt servicing.

Compared to the expected allocation of Rs 48,000 crore, the YSR government borrowed around Rs 58,000 crore through Open Market Borrowings (OMB) during the first half of the current financial year. And these borrowings would reach Rs 1 lakh crore by the end of the fiscal year, which was twice the projected amount. At the end of March 2023, the outstanding liabilities of the state are estimated to be 32.79% of the GSDP.

RBI has repeatedly highlighted Andhra Pradesh’s fiscal fragility and it is a major concern if the state continues to tread on the same trajectory without significantly altering its current fiscal management policies.


Kerala has long been renowned for its remarkable achievements in human development indicators. However, in recent years, the state has faced a significant fiscal crisis characterised by mounting financial challenges and economic instability.

According to the budget estimates for 2022-23, Kerala’s overall debt is projected to reach Rs 3,71,692.19 crore. When considering additional liabilities such as the repayment of the Kerala Infrastructure Investment Fund Board (KIIFB) amounting to Rs 13,000 crore and the Kerala Social Security Pension Ltd (KSSPL) at Rs 7,800 crore, the total debt liabilities are estimated to be closer to Rs 4 lakh crore. 

In fact, the outstanding liabilities of Kerala have risen from 31.58% of the state’s Gross Domestic Product (GDP) to nearly 37.18%. This increase signifies an impending fiscal crisis in the state, particularly considering the deteriorating situation post-pandemic. 

As per the revised estimates for 2021-22, the revenue deficit has risen from Rs 9,657 crore in 2015-16 to Rs 23,176 crore. During the same period, the fiscal deficit increased from Rs 17,818 crore to Rs 37,656.48 crore. Furthermore, the total debt of the state has soared from Rs 1,57,370 crore to Rs 3,33,592.17 crore, with a per-head debt increase from Rs 46,078.04 to Rs 1,05,000.

Source: Infosphere

In 2023-24, the state’s share in central taxes is estimated at Rs 21,425 crore, an increase of 20% over the revised estimates for 2022-23. However, as per the Union Budget 2023-24, Kerala’s share in central taxes in 2023-24 is projected to be lower, around Rs 19,663 crores).

To understand the factors contributing to Kerala’s fiscal crisis, three key areas need to be examined: educated unemployment, rising external debt, and infrastructural failures to crowd in more private capex for growth.

Educated unemployment is a significant issue in Kerala, with a higher unemployment rate among youth compared to the national average. According to the Periodic Labour Force Survey (PLFS) published by the Government of India, the unemployment rate among the 15 to 29-year-old age group in Kerala was 40.5% between January and March 2020, while the national rate stood at 21%.

Additionally, Kerala has been grappling with infrastructure failures, including inadequate food infrastructure, housing shortages, and electricity deficits. While the rice requirement for the state per year is 40 lakh tonnes, the production capacity remains at mere five lakh tonnes. The vegetables required in the state are 20 lakh tonnes per annum, of which the domestic production meets 7 lakh tonnes only. 

On the other hand, twelve lakh families in Kerala are without a proper shelter. A considerable number of existing houses are dilapidated or of sub-standard quality. The state is also currently buying 60 million units from outside, to meet the current daily consumption of 75 million units. 

At least 40 small hydroelectric projects, with a collective capacity of 500 megawatts, have been held up for decades due to the failure of the civil engineering division of the Kerala State Electricity Board (KSEB). 

These infrastructure challenges hinder the state’s overall economic development and contribute to its fiscal crisis. In addition to all those, the constant politicisation of funds from the Centre hasn’t worked in favour of the state government as well.

West Bengal

While West Bengal has shown some positive indicators, such as a decline in outstanding liabilities from 37.05% to 34.23% of the state’s GDP in 2022-23, its fiscal situation remains challenging. Although the outstanding liabilities have been the lowest since 2019-20, it remains high. The cumulative debt exceeds Rs 5.86 lakh crore, with a per capita debt estimate of more than Rs 60,000 (conservative estimates).

Source: Infosphere

Factors contributing to West Bengal’s financial conditions include a high debt burden, low revenue generation, and weak tax administration. This puts pressure on the ability of the state’s Fisc. to maintain sufficient space in financing essential revenue expenditure. The state’s high debt burden also limits its ability to invest in capex spending for developing critical infrastructure, given how its finances remained strained due to high interest payments. 

Although income tax collection in West Bengal increased by 2.4% to Rs 56,422 crore during the financial year 2022-23, it remains insufficient to address the state’s financial requirements adequately.

Fiscal choices do matter!

A comparative analysis between Indian states reveals significant flaws in their fiscal health and choices made by previous governments, providing warning signs of escalating stress in the budgetary situations of Indian states. Between 2011-12 and 2019-20, the average gross fiscal deficit (GFD) to gross state product (GSDP) ratio for states was 2.5%, below the Fiscal Responsibility Legislation (FRL) ceiling of 3%. 

Four states identified in our work here ranked amongst the top five in terms of debt-to-GDP ratio, with their debt outpacing their growth over the past five years, raising concerns. Ideally, these states should be working more closely with the Central government in resolving the structural issues their fiscal scenario faces. 

However, the reverse seems to be happening, for broadly political reasons. Another key question arises: Why are some states performing better while others lag behind? 

Our team observed how there are multiple factors influencing a state’s fiscal health, including:

  1. Taxation laws: States with lower tax rates or tax-friendly policies tend to attract more people and businesses, leading to increased tax receipts.
  2. Economic diversity: States with a diverse range of industries and a broad-based economy are better equipped to withstand economic downturns and maintain stable budgets.
  3. Debt management: States with responsible debt management practices and low debt-to-GDP ratios tend to maintain higher credit ratings and experience lower borrowing costs.
  4. Population: States with younger and more educated populations generally experience faster economic growth, contributing to a stronger budgetary situation.

Improving fiscal health lies in the way states’ economic growth plans are made. Some states focus on raising their GSDP, while others prioritise redistribution and improving the standard of living for their population. 

For example, Kerala’s GSDP decreased by 9.2% in the fiscal year 2020-21 due to the impact of COVID-19. Even before Covid-19, Kerala’s growth rate dropped from 6.49% in 2018–19 to 3.46% in 2019-20. Despite facing challenges, Kerala excelled in certain areas, such as its nearly faultless healthcare system, which received international acclaim during the pandemic. 

Punjab also experienced a decline in GDP growth from 6% in 2018–19 to 4% in 2019–20, with a further 7% drop in 2020–2021 due to COVID-19. However, it achieved significant milestones in providing electricity and clean water access to its residents, as evident in the National Family Health Survey. Interestingly, West Bengal posted a positive GDP growth of 1.2% in 2020-21, despite the overall national GDP drop of 7.7%. 

So, any representation of rising fiscal deficit being relatively seen to be adversely linked to the welfare responsibilities of the state need closer assessment. Kerala, Punjab perform well on many socio-economic indicators (see our Access Equality Index work for more details on this). States like Gujarat, on the other hand, as argued before, may appear to be seen as ‘fiscally better managed’ or ‘high growth’, but in all reality suffer in terms of performance on access to nutrition, healthcare, education, and in ensuring other social-economic developmental opportunities. This author had explained this point at length before the Gujarat elections. 

Looking ahead, a key factor in analyzing the fiscal dangers to a state which may be exposed to high debt, high interest payments, would be to make strategic fiscal policy decisions which help in developing the ‘revenue capacities’ of the state’s fisc. without disrupting the social welfare safety net (or cutting down on welfare spending). For states with newly elected governments like Karnataka, these decisions need closer scrutiny (as discussed earlier here). 

Similarly, for those states heading into polls later this year (from Rajasthan, Chhattisgarh, and Madhya Pradesh) the nature of ‘electoral promises’ made in a party’s campaign agenda must find reasonable coherence with their current macro-fiscal realities (quite often a lot of fiction is peddled by contesting parties for securing ‘votes’).

Deepanshu Mohan is Professor of Economics and Director, Centre for New Economics Studies (CNES), Jindal School of Liberal Arts and Humanities. Amisha Singh, Yuvaraj Mandal, Nishit Patil, Vedika Singhvi are Research Analysts at the Centre.