India's High Debt Levels Currently Sustainable: NCAER Director General

Gupta mentioned that collectively, the states currently hold one-third of the total debt, and under a 'business as usual' scenario, their debt levels are expected to continue rising

India's public debt is nearing 82 per cent of GDP, which is considerably high; however, National Council of Applied Economic Research (NCAER) Director General Poonam Gupta emphasised that the country does not currently face issues of debt sustainability. Speaking at an event hosted by NCAER, Gupta highlighted that India's elevated debt levels remain manageable due to robust growth rates in real or nominal GDP and the predominant holding of debt in local currency.

Gupta mentioned that collectively, the states currently hold one-third of the total debt, and under a 'business as usual' scenario, their debt levels are expected to continue rising over the next five years.

Gupta noted that in a few states, such as Punjab and Himachal Pradesh, the debt-to-GDP ratio could potentially rise by 50 per cent. She added that these states, even the most heavily indebted ones, do not face sustainability concerns due to the implicit guarantee from the central government. Additionally, states are restricted from holding debt denominated in foreign currency or linked to floating interest rates.

Comparing Punjab, one of the states with the highest debt burden, to Gujarat, which has lower debt levels, she highlighted that, ironically, the most indebted states benefit from similar interest rates. In fact, these states with higher debt often secure more extended maturity periods and pay relatively lower premiums.

"More prudent states need a better deal. They are de facto subsidising the more indebted states. The Finance Commission may reward such states for their fiscal prudence, and incentivise the profligate ones to become fiscally more responsible," Gupta added.

Taking part in the panel discussion on "States' Fiscal Challenges," M Govinda Rao, Councilor at the Takshashila Institution, identified the "proliferation of subsidies for electoral gains" as a contributing factor to the mounting debt of states. He emphasised the centre's overarching responsibility for debt control and underscored the necessity for a revised approach, noting that interest payments by financially imprudent states are still considered valid. 

As of 2022-23, Punjab, Himachal Pradesh, and Bihar rank as the top three most indebted states, whereas Odisha, Maharashtra, and Gujarat have the lowest debt levels.