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Debt-to-GDP Ratios in Indian States (2025) and What They Mean for the Economy

Understanding the debt-to-GDP ratio is essential for gauging the financial health of Indian states. This ratio compares a state’s total debt to the size of its economy, offering a clear picture of fiscal strength and borrowing capacity. In 2025-26, this figure varies significantly across states, reflecting their unique economic conditions, governance, and spending patterns. States like Jammu & Kashmir and Nagaland carry higher debt levels relative to their GDP, while others such as Odisha and Gujarat manage their fiscal balance more effectively. These differences influence how states make critical budget decisions and plan for sustainable growth in an evolving economy.

For a straightforward explanation of this concept in action, watch this video to understand how debt-to-GDP ratios shape finance strategies: https://www.youtube.com/watch?v=7WFfsnaHQdQ

Measurement and Current Landscape of Debt-to-GDP Ratios

Understanding the debt-to-GDP ratio for Indian states starts with a simple formula:
Debt-to-GDP ratio = (Total State Debt / State GDP) * 100
This number reveals how much debt a state carries compared to the size of its economy. Imagine it like your personal debt compared to your income — manageable borrowing reflects good financial health, while too much debt can strain your budget. For states, a high ratio suggests they owe a lot relative to what they produce, while a lower ratio signals stronger fiscal footing.

For the fiscal year 2025-26, state budgets show a broad range of debt-to-GDP ratios across the country. These variations reflect differences in economic size, borrowing habits, development needs, and governance quality. Here’s a closer look at which states carry the heaviest debt loads and which maintain more controlled levels.

States with Highest Debt-to-GDP Ratios

At the higher end of debt burdens, several states and Union Territories stand out: Jammu & Kashmir, Arunachal Pradesh, and Punjab lead with some of the top ratios. Their financial stories are shaped by unique challenges:

• Jammu & Kashmir faces high expenses due to infrastructure investments and security concerns. The delicate balance between promoting growth and managing day-to-day governance keeps its debt elevated relative to its GDP.
• Arunachal Pradesh has to manage costs linked to its difficult terrain and limited connectivity. The small GDP base means even modest borrowing pushes the debt ratio higher, as social and development spending increases.
• Punjab carries significant social program costs and legacy expenditures. Despite a sizable population and stable industries, revenue growth hasn’t kept pace with spending, pushing its debt ratio up.

These states highlight a pattern: rugged geography and high social spending require borrowing beyond what their economies currently support. This affects their fiscal flexibility and means they must plan carefully to improve growth and control costs.

States with Lowest Debt-to-GDP Ratios

On the other hand, some states show disciplined fiscal management, growing economies, and strong resource bases that help keep debt under better control. Odisha, Gujarat, Maharashtra, Karnataka, and Chhattisgarh are notable examples:

• Odisha benefits from its mineral wealth and steady industrial development. This strong revenue base allows it to keep debt relatively low despite funding key infrastructure.
• Gujarat has long been a powerhouse for industry and trade, providing diverse income streams. Its efficient fiscal policies and good governance steer borrowing into a safe range.
• Maharashtra enjoys a large, diversified economy with expanding service and manufacturing sectors. Prudent budget management supports a moderate debt load.
• Karnataka combines technological innovation with manufacturing, which fuels growth and healthy revenues, supporting manageable debt ratios.
• Chhattisgarh leverages resource extraction and careful spending, funding growth while keeping debt low.

These states show that strong economic foundations paired with sound fiscal choices can prevent debt from overwhelming growth. Their examples prove that prioritizing revenue enhancement and controlled spending makes a big difference.

A Glimpse at 2025-26 Debt-to-GDP Estimates

This range paints a clear picture: some states must overcome heavy debts linked to their geography and socio-economic demands, while others maintain controls aided by strong industries and resource wealth.

For further details and insight into how these ratios influence state budgets, the article from Forbes India on debt-to-GDP ratio of Indian states in 2025-26 provides comprehensive data and analysis.

This clear measurement allows policymakers, investors, and citizens to understand each state’s fiscal health and priorities, shaping decisions and growth strategies for the years ahead.

Main Causes Behind Rising Debt Levels in Indian States

Debt levels among Indian states have been climbing for several reasons that go beyond mere borrowing. The story is complex, involving government priorities, economic hurdles, and limitations in revenue collection. To understand why many states face growing debt-to-GDP ratios, we need to unpack the main contributing factors that push state finances into stretch mode.

Heavy Spending on Infrastructure

Infrastructure projects are like the skeletons on which the economy stands. Roads, bridges, power plants, and urban development require large investments upfront. Many states are aggressively borrowing to build or upgrade these assets with the intention to spur growth. However, the size and urgency of these projects often lead to ballooning costs, pushing governments to borrow more than what their economic output can presently support.

Infrastructure development ties up capital for years before returns start to come in. This results in a financial strain where expenses rise steeply but revenue growth takes time to catch up. States with uphill terrain or logistical challenges—like those in the North-East—need to spend heavily just to build basic connectivity, escalating their debt levels faster than wealthier states.

Rising Social Welfare Burdens

India’s social welfare programs form a substantial part of state budgets. Pensions, healthcare schemes, education subsidies, and direct cash transfers respond to the needs of millions but come with recurring costs. The pressure to expand social spending has intensified due to changing demographics and public demand for better services.

This continuous rise in welfare costs means states often need to borrow to meet immediate obligations, especially when their tax revenues do not grow proportionally. Welfare spending is essential but without matching revenue increases, it leads to budget deficits that swell debt.

Persistent Budget Deficits and Mismatched Revenue

A budget deficit happens when a state’s expenses outpace its income. Persistent deficits are a common cause of rising debt. Many states struggle to raise adequate revenues through their own efforts because their tax bases remain narrow or uneven.

States depend heavily on central transfers and borrowed funds, which limits autonomy and pressures them to keep borrowing to maintain services. Revenue collection shortcomings combined with increased spending demands create a fiscal gap that only grows larger each year.

Limited Revenue-Raising Powers

Unlike the central government, Indian states have fewer tools to increase revenues independently. The major sources of state income are limited to certain taxes like sales tax (now GST), excise duties, and fees. Meanwhile, big-ticket taxes like income and corporate tax remain mostly with the Union government.

This structural limitation means states rely on borrowing to cover expenditures that outstrip their constrained revenue inflows. Without the ability to effectively mobilize resources internally, debt accumulation becomes an unavoidable fallback.

Impact of Economic Shocks

Economic shocks such as poor monsoons, pandemics, or inflation spikes hit state finances hard. These shocks reduce tax revenues and increase spending needs simultaneously. In times of economic slowdown, states find their debt rising as they attempt to keep up welfare payments and sustaining capital projects.

Such shocks highlight the vulnerability in states’ finances and how they depend on debt to smooth out fiscal pressures, often pushing their debt-to-GDP ratios higher.

Political Spending Pressures

State governments face political demands to increase spending ahead of elections or to support specific interest groups. This leads to populist policies and subsidies that raise expenditures quickly. Political incentives sometimes drive states to overlook long-term fiscal sustainability in favor of short-term gains.

This pressure to spend beyond means results in frequent borrowing that further boosts debt levels, adding a political dimension to financial decisions.

The mix of large infrastructure costs, rising social welfare commitments, constrained revenue powers, and economic uncertainties forms the backbone of escalating debt levels in Indian states. Recognizing these factors is key to crafting fiscal strategies that promote stability and growth while managing borrowing smartly.

For deeper insights into how state finances are shaped and the impact on borrowing, the Forbes India explainer on debt-to-GDP ratios provides a detailed, data-driven look at this evolving challenge.

Factors Driving Differences in Debt-to-GDP Ratios Across States

When you look at the wide gap in debt-to-GDP ratios across Indian states, it’s not just about how much each state borrows. There are deeper forces at play that shape each state’s financial profile. The differences crop up because of varying economic strength, how governments manage their money, the size and needs of the population, unforeseen shocks, and even the nature of political leadership. Think of it like different households managing their budgets: some earn more, some spend more on essentials, and some face sudden emergencies—all of which affect how much debt they carry relative to their income.

Economic Disparities Shape Debt Levels

States with bigger, more diverse economies tend to have more stable debt-to-GDP ratios. For example, Gujarat and Maharashtra have strong industrial bases, thriving trade, and robust services sectors. This broad economic foundation helps generate steady revenue, allowing these states to handle debt comfortably. On the flip side, states with smaller or less diversified economies like Arunachal Pradesh or Jammu & Kashmir find their GDP base limited. When these states borrow heavily for development or social spending, their debt ratios spike because their economies grow slower, much like a smaller business that struggles to handle big loans.

Fiscal Management and Governance Make a Difference

How a state government plans and controls its finances plays a huge role in the debt story. Some states follow strict rules to keep borrowing in check, prioritize spending that sparks growth, and boost own-source revenues through efficient tax collection. Odisha is a good example of sound fiscal management, balancing infrastructure investments without overshooting debt limits. Other states might spend more on subsidies or face leakages in revenue collection, weakening their fiscal position. Strong governance and transparency often build trust among investors, which lowers borrowing costs and reduces pressure to rely on excessive debt.

Population Size and Social Spending Requirements

Population size is more than just a number—it directly affects government expenses and revenues. Bigger states with large populations, like Uttar Pradesh or Bihar, have more mouths to feed, more schools to run, and greater healthcare needs. This raises their social spending significantly. When revenue collection doesn’t scale with population growth or social demands, states need to borrow more, pushing debt ratios higher. Smaller states may have less pressure but also smaller tax bases, which sometimes raises their debt ratios too if they still need to spend heavily on services.

External Shocks Stretch Budgets

Natural disasters, health crises, or sudden economic slowdowns hit state budgets hard. These events reduce tax income while increasing welfare and emergency expenditure. States already burdened with debt find it difficult to bounce back quickly, forcing them to borrow more. For instance, frequent floods or droughts in some regions increase their fiscal strain. These shocks act like unexpected bills that strain a household’s finances, often forcing short-term borrowing that adds to the debt load.

Political Leadership Influences Borrowing Choices

Elections and populist pressures often push governments to spend more to satisfy voters. This can include increasing subsidies, launching welfare schemes, or investing in visible projects without matching revenue plans. While these measures win short-term support, they add to fiscal deficits and borrowing if not managed prudently. Political leadership committed to fiscal discipline tends to keep debt growth under control, while others may prioritize immediate gains over long-term stability.

Regional Economic Diversity and Development Focus

Some states focus more on infrastructure or heavy industry, which demands large upfront spending but slower returns. Others might invest in services or IT sectors with quicker revenue growth. States with resource wealth, such as Chhattisgarh with its minerals, can fund development partly through royalties, easing borrowing pressure. Meanwhile, agricultural-centric states with seasonal income face uneven revenue flow, complicating debt management. This diversity in economic focus naturally affects borrowing trends and debt-to-GDP ratios.

This complex mix means no two states carry debt the same way or for the same reasons. Understanding these forces clarifies why debt-to-GDP ratios vary so widely and how each state faces its own financial challenges.

For an in-depth analysis, the World Bank’s study on why Indian states vary in infrastructure investment offers valuable insights on economic and fiscal factors influencing debt patterns (World Bank report). Similarly, the Forbes India explainer breaks down demographic and political influences on state debt.

Debt-to-GDP ratios across Indian states in 2025-26, highlighting regional variations.

Consequences of High Debt-to-GDP Ratios and State Responses

When a state’s debt starts to grow fast relative to its economy, the consequences ripple through every corner of its finances. High debt-to-GDP ratios tighten the fiscal rope, restricting a state’s ability to respond flexibly to new challenges. Imagine trying to drive a car with a heavy anchor tied to it — progress slows, stops, or even reverses if the burden grows too heavy. In Indian states, this burden affects service delivery, borrowing costs, and investor confidence, often forcing tough policy decisions to recalibrate fiscal health.

Financial Flexibility Gets Squeezed

A high debt ratio severely limits the funds available for essential services like healthcare, education, and public infrastructure. Much of the revenue often goes toward just paying interest on the debt rather than productive spending. This constricts a state’s budget, leaving little room to invest in growth or to respond to emergencies like natural disasters or pandemics. For example, Kerala, which faces a high debt ratio (around 57.1% of GDP as per its Medium-Term Fiscal Plan), spends a large portion of its budget servicing debt. This limits its ability to scale up welfare and new infrastructure at the pace the public demands. States with squeezing finances find themselves stuck servicing old loans rather than investing in the future.

Borrowing Becomes Expensive

When states accumulate large debts, lenders become cautious. Credit rating agencies may downgrade the state’s debt rating, signaling increased risk. Investors, wary of potential default or delays in payments, demand higher interest rates to compensate. This cycle accelerates debt growth — higher interest payments lead to bigger deficits, which lead to more borrowing and yet higher costs. Punjab offers a clear example, carrying a debt-to-GDP ratio near 46.6%. The state’s borrowing costs have risen over the years due to fiscal stress and slower revenue growth, making fiscal management tougher and more expensive.

Investor Confidence Declines

A state’s ability to attract fresh investment, both public and private, depends heavily on its financial reputation. High debt ratios can undermine confidence in the state’s economic outlook. Investors think twice about committing funds if they see the state as financially unstable or overly burdened by debt repayments. This often translates into fewer large projects, less private sector involvement, and slower economic growth overall.

Real-World Responses: Kerala and Punjab

Kerala has approached its debt challenge with clear fiscal discipline. The state amended its Fiscal Responsibility and Budget Management (FRBM) Act to target reducing debt liabilities to 32% of its Gross State Domestic Product (GSDP) by 2025-26. This involves measured fiscal consolidation by controlling new borrowings, boosting own-source revenues, and trimming non-essential expenses while still preserving critical spending on welfare and infrastructure. Kerala’s focus is on revenue-led fiscal consolidation, aiming to shrink debt without causing shocks to essential public programs. You can read about Kerala’s detailed plans in its Medium Term Fiscal Plan 2025-26.

Punjab has faced more complex challenges due to structural fiscal deficits and slower revenue growth. The state government is working to consolidate finances by improving tax collection efficiency and rationalizing subsidies. Despite a high fiscal deficit estimated above the permissible 3% of GSDP, Punjab’s budget aims to cut this gradually while investing in key sectors like agriculture and industry to stimulate growth. The state has adopted stricter fiscal monitoring and prioritizes debt servicing to stabilize its credit profile. Detailed fiscal trends and projections are summarized in Punjab’s budget white papers and analyses.

What States Can Learn

• Control new borrowing: Target borrowing below economic growth rates to avoid spiraling debt.
• Improve revenue efforts: Build durable tax bases and plug leakages to fund recurring spending.
• Manage interest payments: Focus on affordable loans and timely repayments to keep debt costs sustainable.
• Prioritize essential spending: Protect allocations for health, education, and infrastructure even during consolidation.

Successful fiscal management is less about quick fixes and more about steady, balanced adjustments. Kerala and Punjab’s approaches show how long-term vision paired with disciplined spending can gradually ease debt pressures while safeguarding the welfare of citizens.

For further reading on Kerala’s fiscal discipline and targets, check the Macro and Fiscal Landscape of Kerala report by Niti Aayog.

Punjab’s fiscal challenges and measures are elaborated in the detailed fiscal scenario report by Niti Aayog.

Strategies for Sustainable Debt Management in Indian States

Managing debt sustainably is crucial for Indian states to maintain fiscal stability and foster long-term growth. Rising debt-to-GDP ratios highlight the need for clear strategies to keep borrowing in check while investing smartly in the future. Just like balancing a household budget, states must craft policies that boost revenue, control spending, and ensure debt stays within manageable limits. The right approach strengthens credit ratings, lowers borrowing costs, and preserves room for essential public investments.

Strengthening Fiscal Discipline by Reducing Deficits

The backbone of sustainable debt management is fiscal discipline. States should aim to keep their fiscal deficits — the gap between revenue and expenditure — under control. This means curbing unnecessary spending, prioritizing essential programs, and focusing on efficiency in public expenditures. Adhering to fiscal responsibility laws like the Fiscal Responsibility and Budget Management (FRBM) Act encourages transparency and accountability in borrowing and spending.

A steady reduction in deficits prevents debt from spiraling and builds confidence among investors and lenders. Kerala’s fiscal plan, targeting a debt-to-GSDP ratio of 32% by 2025-26, relies heavily on such disciplined budgeting to trim the gap between income and outflows without hurting core social sectors (Kerala’s fiscal plan).

Increasing Revenues Through Improved Tax Systems

Boosting state revenues allows governments to fund essential services and repay debt without resorting to excessive borrowing. States can widen their tax base, improve tax collection efficiency, and reduce leakages. Streamlining GST compliance and expanding property and professional taxes can also add sustainable income streams.

For example, Gujarat and Karnataka have demonstrated that enhancing own-source revenues supports fiscal health without stifling economic growth. Improving revenue mobilization gives states greater autonomy and reliability to meet expenditures sustainably.

Responsible Borrowing and Debt Refinancing

Borrowing should be aligned with a state’s repayment capacity and economic growth prospects. States need to avoid excessive short-term and high-interest borrowings that can increase fiscal stress. Opting for low-cost loans, longer maturities, or market-based bonds with attractive terms helps reduce interest burdens.

Refinancing existing debt with cheaper funds or restructuring liabilities also eases pressure. Punjab’s ongoing fiscal reforms focus partly on rationalizing subsidies and improving debt servicing to stabilize its finances (Punjab’s fiscal landscape).

Investing in Growth-Enhancing Sectors

Public investment should prioritize sectors that spur economic growth, thus broadening the GDP base and enabling better debt sustainability. Infrastructure projects that improve connectivity, energy, and urban services attract private investment and boost productivity over time.

State governments should favor projects with measurable economic returns and avoid committing to recurring liabilities unless backed by reliable revenue. Sectors like technology, manufacturing, and renewable energy offer promising avenues for long-term economic expansion.

Enhancing Credit Ratings and Lowering Borrowing Costs

Consistent fiscal improvement positively impacts a state’s credit rating, making borrowing cheaper and easier. Transparent financial management, adherence to fiscal rules, and steady economic growth build investor trust.

States like Odisha and Maharashtra benefit from higher credit ratings due to strong governance and stable debt levels. A better rating lowers interest costs and opens access to a wider pool of lenders, creating a virtuous cycle of fiscal health.

Photo by Ravi Roshan

Implementing these strategies requires steady policy commitment, regular monitoring, and coordination between states and the central government. Sustainable debt management isn’t a quick fix—it is a long road demanding effort but promising a stronger fiscal future for India’s states.

For a detailed fiscal sustainability analysis in Indian states, see the study on Debt Sustainability in Indian States by IES. Additionally, the Forbes India explainer on debt-to-GDP ratios provides useful context on the topic.

Map visualizing debt-to-GDP levels by state, highlighting regional financial diversity. Image created with AI.

Conclusion

Monitoring debt-to-GDP ratios at the state level offers critical insight into each state’s financial health and borrowing capacity. The wide variation among Indian states reflects diverse economic strengths, governance practices, and spending priorities.

Balancing debt with economic growth and sound fiscal policies is essential for states to maintain fiscal flexibility, protect essential services, and sustain investor confidence. States with stronger economies and disciplined budgets show that managing debt effectively leads to better growth prospects and stability.

Awareness of these differences helps policymakers craft tailored strategies that encourage revenue growth, control deficits, and prioritize productive investments. This approach can guide Indian states toward a more secure fiscal future, supporting balanced development and long-term economic resilience.