India’s States show a mixed fiscal picture in 2025. While some report revenue surpluses, many rely heavily on borrowing and unstable income sources. The pandemic disrupted State finances, pushing most into higher debt. Fiscal strategies and debt burdens vary widely across States. Welfare spending continues amid constrained resources creating a paradox of growth and fragility.
Revenue Surplus and Fiscal Diversity
Uttar Pradesh’s ₹37,000 crore surplus in 2025 surprised many. However, this surplus masks deeper issues. The State generates only 42% of its revenue internally and depends largely on Union transfers. Other States like Maharashtra raise nearly 70% of their funds internally. This vertical imbalance means richer States self-finance while poorer ones rely on Delhi. Non-tax incomes such as lotteries, mining royalties, and land sales are often volatile and unsustainable.
Borrowing Trends and Debt Burden
States borrow to cover deficits. Andhra Pradesh and Bihar have sharply increased borrowings, with debt-to-GSDP ratios around 35-39%. Goa and Odisha kept borrowings low. Rajasthan and Telangana saw steep borrowing rises, pushing liabilities to 40% and 28% of GSDP respectively. Punjab’s debt remains high at 45%, signalling chronic stress. Smaller States like Himachal Pradesh and Nagaland face heavy debt burdens relative to their economies, ranging from 40-60% of GSDP.
Impact of the Pandemic on State Finances
The pandemic caused tax revenue drops and emergency spending spikes. Borrowings surged in 2020-21 across most States. Some, like Karnataka and Kerala, reduced borrowings post-pandemic. Others, including Andhra Pradesh and Rajasthan, continued increasing debt. Odisha and Uttar Pradesh managed to lower borrowings, reflecting diverse fiscal responses. The pandemic exposed States’ fiscal vulnerabilities and reliance on debt.
Welfare Spending and Fiscal Paradox
Despite surpluses, many States spend little on welfare. Surpluses often reflect accounting gains rather than developmental progress. States like Punjab face chronic debt due to welfare costs. Kerala depends on unstable lottery revenues. Andhra Pradesh and Uttar Pradesh defer costs through guarantees and special purpose vehicles. Central transfers fund schemes like PM-KISAN and Ayushman Bharat, projecting political goodwill. India’s welfare state is large but built on a fragile fiscal foundation with excessive borrowing.
Fiscal Challenges and Future Outlook
States manage some of the world’s largest budgets but face uneven revenue bases. Reliance on volatile income and borrowings threatens fiscal sustainability. The GST regime changes add uncertainty to future revenues. Balancing welfare needs with fiscal prudence remains a key challenge. States must improve internal resource mobilisation and rationalise expenditures to avoid debt traps.
Questions for UPSC:
- Critically discuss the impact of vertical fiscal imbalance on the economic autonomy of Indian States and its implications for federalism in India.
- Analyse the role of non-tax revenue sources such as lotteries, mining royalties, and land sales in State finances. What are the sustainability challenges associated with these sources?
- Examine the effects of the COVID-19 pandemic on the fiscal health of Indian States. How have different States adapted their borrowing strategies post-pandemic?
- Point out the paradox of welfare spending and fiscal constraints in Indian States. How does this affect the delivery of social services and long-term economic growth?
