Mumbai: Even though hilly states, such as Arunachal Pradesh, have large government debt to Gross State Domestic Product (GSDP) Ratios–that is the ratio of their debt to the total value of all goods and services produced in the state in a year–it is the quantum of debt of large states–Punjab, West Bengal and Rajasthan–along with the kinds of expenditure that this money is used for, that make these states a greater risk for fiscal stability, data show and experts say.

Twelve hilly states (Jammu and Kashmir, Ladakh, Uttarakhand, Himachal Pradesh, Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Assam) combined have a total debt of Rs 6.11 lakh crore, compared to Punjab’s debt of Rs 3.78 lakh crore, West Bengal’s debt of Rs 7.14 lakh crore and Rajasthan’s debt of Rs 6.37 lakh crore.

These three states also consistently exceed safe debt-to-GSDP thresholds–Rajasthan at 35.8%, Punjab at 46.6% and West Bengal at 38%, meaning that their total outstanding debt is large relative to the size of its economy. They also struggle with weak revenue mobilisation, rising interest burdens, and low capital expenditure. Experts warn that these structural issues make their debt far less manageable than that of smaller hilly states.

State’s debt to GSDP ratio, by the numbers

The five Indian states with the highest projected debt-to-GSDP ratios in 2025 are Arunachal Pradesh (57.0%), Punjab (46.6%), Himachal Pradesh (45.2%), Nagaland (40.0%) and Meghalaya (39.0%). Except Punjab, these are hilly states with limited revenue bases and higher per capita expenditure needs, contributing to high debt levels.

Arunachal Pradesh reduced its debt to GSDP ratio from 57.7% in 2007 to 28.5% in 2017, however since 2019, the ratio has increased from 31% to a projected 57% in 2025. The debt to GDSP ratio of Himachal Pradesh, Nagaland, and Meghalaya has remained in the 35–45% range for over a decade.

Many states in India need better planning and should control borrowing, experts say. The all-India average debt to GSDP ratio increased from 22% in 2014 to 31% in 2021 during the COVID-19 pandemic, coming down to an estimated 28.8% in 2025.

“The main contributing factors to a state’s debt-to-GDP ratio, I’d highlight three. First is the level of economic activity itself--GSDP is the denominator, so states with faster-growing economies naturally have a lower debt-to-GDP ratio. Second, there's often a mismatch between revenue and expenditure. Third, some states--like Tamil Nadu--prioritise spending on social sectors, which is important, but if the GSDP doesn’t grow at the same pace as this spending, it raises the debt ratio,” says professor NR Bhanamurthy Director, Madras School of Economics.

India’s total debt burden has grown

Between 2015 and 2025, the total outstanding debt of all Indian states and union territories has more than tripled, rising from ₹27.43 lakh crore in 2015 to a projected ₹93.93 lakh crore in 2025.

“Fiscal decentralisation, especially post-14th Finance Commission, increased the share of Union taxes to states from 32% to 42%, giving them more spending autonomy. However, their developmental responsibilities have grown faster than their ability to raise revenue,” said Sharad Pandey, senior research associate at the Foundation for Responsive Governance. “Between FY 2018–19 and FY 2020–21, states’ revenue collections declined due to an economic slowdown followed by the COVID-19 shock. To sustain expenditure, states increased borrowing, causing their total liabilities to rise.”

“Also, many states engage in off-budget borrowing [such as by Public Sector Undertakings on behalf of the government which is not reflected in the budget] despite constraints like the Fiscal Responsibility and Budget Management Act (FRBM) (which sets the borrowing limit for states at 3% of their GSDP). This may not show up in the fiscal deficit, it increases overall debt levels,” explained Bhanamurthy.

Tamil Nadu, Maharashtra, Uttar Pradesh, Karnataka, and West Bengal consistently report the highest total outstanding liabilities, data show. These states also have large economies, which helps keep their debt-to-GSDP ratios moderate—between 19% and 38%. For instance, Maharashtra, despite having among the highest debt totals, maintains a relatively low debt-to-GSDP ratio (19%) because of its robust economic base. In contrast, Punjab, with a debt of ₹3.78 lakh crore in 2025, has a high debt-to-GSDP ratio (46.6%), highlighting structural fiscal stress, which is not due to shocks such as Covid-19, but because of lower revenue generation year-on-year. Punjab also has large interest payments, weak revenue generation, and inefficiencies in capital expenditure, with reliance on non-tax revenue, impacting its fiscal health, as per the NITI Aayog Fiscal Health Index report.

Smaller states like Mizoram, Manipur, Meghalaya, Arunachal Pradesh and Nagaland have relatively low absolute debt figures (ranging between ₹14,000–₹25,000 crore projected for 2025). However, these states have some of the highest debt-to-GSDP ratios, often exceeding 40%, due to their limited economic size. For example, Arunachal Pradesh’s debt quantum is ₹25,464.3 crore in 2025, yet its debt-to-GSDP ratio is the highest in the country at 57%.

Productive vs unproductive debt

Recent research shows that borrowing itself isn’t the problem—what matters is how states use the money and whether they can repay it.

Many high-debt states are accumulating unproductive debt, experts say. Debt is unproductive when money is not spent on social and economic services to create physical infrastructure and human resource development, but on general administration and debt servicing. If these states also have a weak revenue generation capacity, it is difficult for them to service their debt, without relying on Union government transfers or further borrowing.

“Borrowing is also used to finance capital expenditure or asset creation-projects that generate future revenue streams and help you repay the debt. This kind of borrowing is development-oriented and considered productive,” explains Manish Gupta, Associate Professor at the National Institute of Public Finance and Policy (NIPFP).

For instance, states like Madhya Pradesh, Odisha, Goa, Karnataka and Uttar Pradesh allocate around 27% of their developmental expenditure to capital expenditure, while West Bengal, Andhra Pradesh, Punjab, and Rajasthan allocate only about 10%.

“Borrowing to finance current or committed expenditures [such as administration costs]--when there's a revenue deficit--is less desirable. That’s essentially borrowing for consumption, which doesn’t generate any future income and only adds to your liabilities. So ideally, borrowing should be for development purposes--like building roads or infrastructure--not for meeting day-to-day operational expenses,” said Gupta.

A 2024 paper by the NIPFP says that “an increase in debt to GSDP ratio beyond a threshold of 23.3% can contribute to economic growth in high social spending states, if the debt is sustainable for the state.” But, the paper says, states with low social spending see no such benefit. Low-growth states gain more from borrowing than richer ones, and states (such as Himachal Pradesh, Jharkhand, Andhra Pradesh, Haryana, Bihar, Rajasthan, UP and Odisha) that invest in economic infrastructure or allocate over 2% of GSDP to capital expenditure can safely carry even higher levels of debt, up to 27.3% debt to GSDP ratio.

The NITI Aayog report also highlights states that have done well in managing their debt. Odisha, for instance, efficiently collects mining-linked premiums, while Chhattisgarh has benefited from coal block auctions, and Goa has tapped into collections from SGST, taxes on sales, stamp duty and registration fees.

Even among economically larger states, outcomes vary based on revenue strategies. Maharashtra and Gujarat have sustained relatively low debt-to-GSDP ratios through strong revenue mobilisation. Telangana, despite rising liabilities, has shown improvement in fiscal health by strengthening revenue mobilisation, and rising non-tax revenue and tax revenue, the report said.

IndiaSpend reached out to Vaibhav Galriya, Principal Secretary of Finance, Rajasthan; Krishan Kumar, Principal Secretary of Finance, Punjab; and Dr. Amit Mitra, Principal Chief Advisor to the Chief Minister of West Bengal and former Finance Minister, for their views on the rising debt burdens in their respective states. Specifically, we sought their responses to questions on how their governments plan to improve the quality of public borrowing, whether any fiscal consolidation measures are being considered, and what strategies are being adopted to enhance capital expenditure and revenue mobilisation.​​ We will update the story when we receive a response.

Impact of debt on social sector spending

Experts say borrowing can help states, but only if it’s used for long-term development, not short-term liabilities.

But “as debt servicing (interest and principal repayments) grows, fiscal space for capital expenditure--essential for infrastructure, health, education, and even climate adaptation--shrinks,” says Avani Kapur, founder and director of the Foundation for Responsive Governance. “States thus prioritise mandatory revenue expenditures like salaries and pensions, often at the cost of long-term investments--both capital and longer term human development.”

Between 1990-91 and 2020-21, Indian states have spent between 3.5% and 5.5% of their total budget on health, with only Delhi and Puducherry spending higher than 8% as recommended by the National Health Policy 2017, as per a study by the Centre for Social and Economic Progress in June 2024.

In education too, data show that all states and Union Territories together spent 2.2% of the country’s Gross Domestic Product (GDP) on education, which rose to 2.6% in 2015. But post the 14th Finance Commission, which reduced Union government transfers to states, this stagnated to 2.6%, with a brief increase to 2.7% in 2020-21. In 2025, education spending is projected at 2.6% of GDP, versus the recommended 6% of GDP.

Prachi Salve

    Prachi has two masters degrees: In economics from Mumbai University and in development studies from the University of Sussex, UK. She holds a bachelor’s degree in economics from St. Xaviers College, Mumbai. She has been a research assistant at the Institute of Development Studies (UK) and the Young Foundation (UK). She has also worked for Greenpeace India in the fundraising division.