India’s state finances have been under scrutiny, with some states struggling with mounting debt while others have successfully managed their fiscal health. Among them, Gujarat, Odisha, West Bengal, and Maharashtra stand out for their ability to control rising debt-to-GSDP ratios, unlike other states witnessing increasing fiscal pressure.
How These States Cracked the Debt Code
The fiscal strategies employed by these four states provide key insights into how effective governance can maintain financial stability. Their approach can be broadly categorized into three major areas:
1. Strengthening Revenue Streams
- These states have actively expanded their tax base by improving compliance and implementing better tax administration.
- They have also diversified revenue sources through land monetization, disinvestment, and infrastructure investments that generate steady income.
- Maharashtra and Gujarat have leveraged industrial development and export-driven economies, ensuring a continuous inflow of revenue.
2. Disciplined Spending Approach
- Unlike states facing heavy debt burdens, these states have avoided excessive subsidies and prioritized capital expenditures that enhance economic growth.
- Odisha and West Bengal, in particular, have focused on infrastructure development, ensuring that government spending creates long-term financial benefits.
- Gujarat has strategically reduced wasteful spending by enforcing budgetary controls and performance audits.
3. Maintaining Fiscal Discipline
- Strict compliance with Fiscal Responsibility and Budget Management (FRBM) Act has helped these states avoid unsustainable borrowing.
- Maharashtra has kept its fiscal deficit in check, ensuring that borrowing is used productively rather than for short-term populist measures.
- Odisha has used state-led investment funds to support developmental projects without significantly increasing liabilities.
Why Other States Are Struggling with Debt
While Gujarat, Odisha, West Bengal, and Maharashtra have effectively reduced their debt burden, several states face the opposite trend. Punjab, Rajasthan, and Tamil Nadu are among the states whose debt-to-GSDP ratios are expected to cross 50% by 2027-28. The primary reasons for their fiscal challenges include:
1. Over-Reliance on Borrowing
- These states have relied heavily on loans to fund revenue expenditure, rather than using borrowed capital for productive investments.
- Debt servicing costs have grown faster than revenue growth, leading to financial strain.
2. Rising Expenditure on Subsidies
- Free electricity, loan waivers, and direct benefit transfers have increased the fiscal burden.
- Many states have not introduced reforms to ensure targeted benefits rather than blanket subsidies.
3. Weak Tax Revenue Growth
- Unlike Gujarat and Maharashtra, where industrial and service sectors generate high tax revenue, states like Punjab and Rajasthan have limited sources of own tax revenue.
- Dependence on central government grants has increased financial uncertainty.
Lessons for Other States
To improve their financial health, struggling states must adopt strategies that prioritize long-term economic sustainability over short-term political gains. Key recommendations include:
1. Restructuring Debt Management
- Implement strict borrowing limits to prevent over-leveraging.
- Explore better interest rate negotiation with financial institutions for lower debt servicing costs.
2. Strengthening Revenue Generation
- Increase the efficiency of Goods and Services Tax (GST) collection.
- Encourage private investment and boost industrial growth to expand the tax base.
3. Rationalizing Expenditure
- Reduce wasteful spending and redirect funds to high-return projects.
- Implement performance-based budgeting to ensure effective fund utilization.
Final Thoughts
The stark difference between states effectively managing debt and those struggling highlights the importance of fiscal responsibility, efficient revenue collection, and disciplined spending. Gujarat, Odisha, West Bengal, and Maharashtra offer valuable lessons in navigating economic challenges while ensuring sustainable development.