Debt-to-GDP and Fiscal Deficit Analysis: A Comprehensive View of India’s Fiscal Health (FY 2024-25)

Understanding the fiscal health of a country is critical to gauging its economic stability and future growth prospects. For India, a closer look at the Debt-to-GDP ratio and fiscal deficit trends across the central and state governments reveals an intricate web of opportunities and challenges. These two metrics are not just numbers—they are vital indicators of economic resilience, fiscal prudence, and growth potential.

This article delves deeper into the nuances of India’s fiscal data for FY 2024-25, providing an exhaustive analysis of the numbers and their implications for policymakers, businesses, and citizens.

What Do Debt-to-GDP and Fiscal Deficit Mean?

Before diving into the specifics, it’s essential to understand the two key metrics:

1. Debt-to-GDP Ratio:
   The Debt-to-GDP ratio is a measure of how much debt a government has accumulated relative to its gross domestic product (GDP). It essentially reflects a government’s borrowing level in comparison to the size of the economy. A higher ratio indicates greater reliance on borrowing, which, if unchecked, could lead to financial instability or reduced capacity for future spending.
2. Fiscal Deficit:
   Fiscal deficit refers to the gap between a government’s total expenditure and its total revenue (excluding borrowings). A high fiscal deficit suggests that the government is spending more than it earns, necessitating borrowing to bridge the gap. This metric is critical as it directly impacts the Debt-to-GDP ratio and future fiscal sustainability.

The Central Government: A Heavy Borrower

The central government recorded the highest Debt-to-GDP ratio in FY 2024-25, standing at 57.1%. This figure is significantly higher than any state’s debt ratio and underscores the central government’s heavy reliance on borrowing to meet its fiscal needs. Key factors driving this high ratio include:

• Large-scale infrastructure spending: Projects like highways, railways, and rural development often require significant capital investment, which is often debt-financed.
• Social welfare schemes: Subsidies on food, fuel, and fertilisers add to the fiscal burden.
• Revenue constraints: Limited growth in tax revenue, especially in direct taxes, exacerbates the fiscal imbalance.

The central government’s fiscal deficit stands at 4.9%, reflecting a controlled yet notable shortfall between revenue and expenditure. While this is within the target range set by the Fiscal Responsibility and Budget Management (FRBM) Act, it leaves little room for additional borrowing without further increasing the debt burden

States with High Debt-to-GDP Ratios

Several states exhibit alarming Debt-to-GDP ratios, raising concerns about their fiscal health and sustainability:

1. Punjab: 44.1%

Punjab’s high debt ratio is primarily driven by:

• Persistent agricultural subsidies that strain the state’s finances.
• A limited industrial base, leading to slower economic growth.
• Rising costs of salaries and pensions for government employees.

2. Himachal Pradesh: 42.5%

Himachal Pradesh faces similar challenges, including:

• Heavy spending on welfare programs and infrastructure in hilly areas.
• A lack of robust revenue-generating industries.

3. Arunachal Pradesh: 40.8%

This northeastern state relies heavily on central transfers and loans. Limited avenues for internal revenue generation and high developmental expenditure contribute to its growing debt burden.

States with Moderate and Low Debt-to-GDP Ratios

On the other hand, several states demonstrate fiscal prudence by maintaining lower Debt-to-GDP ratios. These include:

Delhi: 3.9%

Delhi boasts the lowest Debt-to-GDP ratio in the country, reflecting:

• A strong revenue base due to efficient tax collection and higher economic activity.
• Lower reliance on borrowing, thanks to better fiscal management.

Odisha: 13.6%

Odisha has managed its finances well through:

• Focused industrial development, particularly in mining and manufacturing.
• Disciplined expenditure management.

Gujarat: 15.3%

Gujarat’s robust industrial and services sector drives its revenue growth, enabling the state to maintain a low debt ratio.

Fiscal Deficit Trends Across States

While the FRBM Act recommends states keep their fiscal deficit below 3% of GSDP (Gross State Domestic Product), several states exceed this threshold:

• Arunachal Pradesh (6.3%) and Andhra Pradesh (5.4%) show alarmingly high fiscal deficits, driven by high expenditure and limited revenue growth.
• Most other states, including Karnataka, Tamil Nadu, and Gujarat, manage to maintain deficits within acceptable limits, reflecting better fiscal discipline.

Key Regional Trends: The Rural-Urban Divide

A closer examination of the data highlights stark regional disparities:

Northern and Northeastern States:

• These states generally exhibit higher Debt-to-GDP ratios, largely due to limited economic activity and over-reliance on central assistance.
• Welfare programs, infrastructure challenges, and low tax bases further strain their finances.

Southern and Western States:

• States like Tamil Nadu, Karnataka, and Gujarat showcase stronger fiscal positions, thanks to diversified economies, better governance, and efficient revenue collection systems.

Implications of High Debt-to-GDP Ratios

High Debt-to-GDP ratios, particularly for the central government and certain states, can have far-reaching implications:

1. Reduced Fiscal Space: High debt levels limit a government’s ability to invest in growth-oriented sectors like infrastructure and education.
2. Increased Borrowing Costs: As debt levels rise, governments may face higher interest rates, leading to greater fiscal stress.
3. Intergenerational Burden: Excessive debt today can translate into higher taxes or reduced services for future generations.

Policy Recommendations

1. Enhancing Revenue Collection: States need to widen their tax base and improve compliance to reduce their reliance on borrowing. Initiatives like the Goods and Services Tax (GST) have helped, but further reforms are needed.
2. Rationalizing Expenditure: Governments, particularly those with high debt levels, must prioritise spending on productive sectors that yield long-term benefits.
3. Strengthening Central-State Coordination: The central government should provide targeted support to high-debt states while encouraging fiscal discipline through stricter adherence to FRBM targets.
4. Encouraging Private Sector Participation: Public-private partnerships (PPPs) can help reduce the fiscal burden on governments while ensuring essential infrastructure development.

Why This Analysis Matters

India’s fiscal landscape for FY 2024-25 tells a story of contrasts. While some states and the central government grapple with high debt and fiscal deficits, others set examples of fiscal discipline and effective governance. Bridging these disparities is crucial for ensuring balanced and sustainable growth across regions.

As citizens, policymakers, and investors, understanding these dynamics is critical. Prudent fiscal management, innovative revenue-generation strategies, and efficient governance are essential for safeguarding India’s economic future.

By addressing fiscal imbalances today, India can unlock its full economic potential, ensuring prosperity for its citizens and stability for its markets.