Sitharaman flags fiscal stress in states, calls for disciplined finances and manufacturing push

Finance Minister Nirmala Sitharaman has raised a serious warning on the fiscal health of several Indian states, pointing to rising debt levels and a worrying shift in how states are using borrowed funds. She said recent studies show that in some cases, fresh borrowing is no longer financing development projects but is instead being used to repay old loans and interest , a trend that could weaken India’s long term growth momentum if left unaddressed.

In practical terms, this means states are caught in a debt rollover cycle. When interest payments and loan repayments consume a large share of annual budgets, governments are forced to borrow again simply to meet these obligations. As a result, the debt stock rises without the creation of new assets such as roads, factories or power infrastructure that could generate future income. Over time, this reduces fiscal space and limits spending on health, education and capital investment.

The scale of the problem has grown in recent years. While state debt rose sharply during the Covid period due to emergency spending and revenue collapse, the concern now is that elevated deficits are continuing even after economic recovery. Several states are running fiscal deficits well above the recommended 3 percent of Gross State Domestic Product, with debt levels in some cases exceeding 40 percent. A rising interest burden is steadily crowding out development spending.

Multiple factors have pushed states into this situation. High revenue expenditure on salaries, pensions and welfare schemes has grown faster than revenues. Own tax collections remain uneven, increasing dependence on central transfers and borrowing. In addition, losses in power utilities, off balance sheet liabilities and election driven spending commitments have added pressure to state finances. In many cases, delayed or low return infrastructure projects have failed to generate the revenue needed to service debt.

This trend carries wider economic risks. When states spend more on interest payments, they invest less in growth creating infrastructure. High borrowing requirements can raise market interest rates, increasing costs for both states and the Centre. Heavily indebted states also have less capacity to respond to shocks such as natural disasters or economic slowdowns, shifting the burden to future generations.

With the Union Budget due to be presented in February , attention is now on how fiscal incentives can be reshaped. While the Centre cannot control state budgets directly, it can encourage reform by linking additional borrowing space to fiscal discipline, expanding interest free loans strictly for capital expenditure, improving transparency on liabilities and supporting revenue mobilisation through better tax compliance and private investment.

Sitharaman’s warning signals a larger policy concern. Borrowing is not the problem. Borrowing without building future capacity is. Whether upcoming budget measures can push states back towards borrowing for growth rather than survival will determine how serious today’s fiscal stress becomes in the years ahead.