The rising public debt crisis in Indian states, exemplified by Karnataka’s fiscal challenges, highlights broader structural issues in state-level financial management.
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The rising public debt crisis in Indian states, exemplified by Karnataka’s fiscal challenges, highlights broader structural issues in state-level financial management. Public debt, a key fiscal health indicator, reveals troubling trends across the nation.
In 2006, Karnataka’s debt-to-GSDP (gross state domestic product) ratio stood at 25.3 per cent, below the national average of 31.1 per cent. By 2012, the state reduced its ratio to 16.2 per cent, driven by strong economic growth, fiscal discipline, and effective debt management. A thriving IT sector, progressive reforms, and an industrial boom played crucial roles in this impressive decline, showcasing Karnataka’s resilience amid fiscal challenges.
However, this success was short-lived. From 2012 onwards, Karnataka’s debt levels began to climb, reaching 25.9 per cent of GSDP in 2021. A modest decline to 22.7 per cent is projected by 2024, but this improvement does not offset the underlying trend.
Key contributors to the state’s rising debt include increased public spending on welfare schemes, ambitious infrastructure development projects, and the economic disruptions caused by the Covid-19 pandemic. The pandemic in particular dealt a severe blow to state finances, slashing revenues while simultaneously driving up healthcare and relief expenditures. Borrowing became an unavoidable tool to bridge fiscal gaps, as it did for most Indian states during this period of unprecedented crisis.
Karnataka’s experience, while notable, is far from unique. Across India, many states are grappling with rising debt burdens that threaten their financial stability. Punjab, for instance, reported an alarming debt-to-GSDP ratio of 47.9% in 2021, reflecting years of unchecked fiscal profligacy and high levels of committed expenditures, including pensions, salaries, and interest payments. Kerala’s debt ratio was similarly high at 40.3%, driven by a combination of welfare spending and limited revenue-generating capacity. Bihar’s debt-to-GSDP ratio stood at 40.1%, underscoring the challenges faced by economically weaker states that rely heavily on central government transfers. States like Rajasthan, Uttar Pradesh, and West Bengal have also seen significant increases in their debt burdens, often due to a mix of welfare spending and large-scale infrastructure investments.
Tamil Nadu offers another perspective on the debt crisis. Known for its industrial prowess and relatively high economic growth, Tamil Nadu has nonetheless seen its debt levels rise steadily, from 19.4% of GSDP in 2016 to 31.8% in 2021. Much of this increase can be attributed to heavy investments in public health, welfare schemes, and infrastructure. These expenditures, while necessary for development, highlight the delicate balance states must strike between fostering growth and maintaining fiscal sustainability. The nationwide trend of rising debt ratios points to deeper systemic issues. One major factor is the growing reliance on borrowing to meet expenditure needs. Economic shocks, such as the 2008 global financial crisis and the Covid-19 pandemic, have severely impacted state revenues. Simultaneously, the implementation of the Goods and Services Tax (GST) in 2017 restructured the fiscal framework, reducing states’ autonomy over direct taxation. While the GST aimed to create a unified tax regime, it also made states heavily dependent on GST compensation from the central government. The end of the compensation period in 2022 has left many states struggling to adapt to this new fiscal reality.
Karnataka’s rising debt is emblematic of these broader challenges. While its fiscal deficit — hovering at about 2.47% in 2022-23 — is lower than that of many other states, the trend of increasing liabilities signals the need for urgent reforms. The pandemic years, in particular, saw Karnataka’s fiscal deficit widen significantly, mirroring the experience of states like Kerala and Telangana, which faced similar pressures to ramp up healthcare and relief spending.
Not all states, however, are in the same fiscal predicament. Gujarat, Uttarakhand, and Chhattisgarh have demonstrated better fiscal discipline, maintaining relatively lower deficits or achieving surpluses in certain years. These states have benefited from stronger revenue-generation capabilities and more prudent borrowing practices. In contrast, states like Bihar, Punjab, and West Bengal continue to struggle with high deficits and growing debt burdens, leaving them vulnerable to fiscal crises.
Karnataka’s debt trajectory reflects a broader fiscal crisis in India, exposing the fragility of fiscal federalism. Addressing these challenges demands a multi-pronged strategy: states must broaden their tax base, improve compliance, optimise non-tax revenues, and empower local governance to raise funds. Transparency in managing off-budget borrowings is crucial to prevent long-term financial strain. The central government can aid by revisiting GST compensation and implementing state-specific fiscal rules to promote sustainable borrowing. While Karnataka’s debt levels remain moderate compared to states like Punjab and Kerala, the upward trend highlights an urgent need for revenue enhancement, fiscal discipline, and transparent debt management to ensure long-term sustainability.
(The writer is Associate Professor, Department of
Economics, Christ deemed to be university, Bengaluru)