The Union government is prodding states to lower their partiality towards revenue expenditure while also planning to entirely link the amount it will borrow from the bond market to its outlays for effective capital expenditure from FY27 onwards, a senior government official said. Revenue expenditure includes all government spending that does not result in the creation of assets or reduction of liabilities, including salaries, interest payments, subsidies, etc.
The decision of choosing the debt-to-GDP ratio as a fiscal anchor from FY27 onwards has raised hopes for a sovereign rating upgrade. However, since international rating agencies look at the overall debt levels, efforts are underway to nudge states to follow suit.
These efforts come amid plans to bring down the overall debt-to-GDP ratio of the Centre and states by improving the quality of expenditure by tempering Centre’s borrowings from the market. The Indian government aims to reduce its debt-to-GDP ratio from the current 57.1 percent to 50 percent by March 31, 2031. In FY26, the Centre will borrow Rs 14.82 lakh crore from the bond market in gross terms, while the government's effective capital expenditure is projected at Rs 15.48 lakh crore.
The Centre on its part has already taken steps in this regard by narrowing the gap between effective capital expenditure and the borrowing number to only Rs 21,000 crore for FY26.
“The gap between effective capex and borrowings is just 0.2 percent of our GDP. Next year the government will borrow to only fund their capex… Not just prodding, we have been elbowing states to do more capex and do less revex (revenue expenditure),” the official said.
This given that one of the ways to bring down the debt-to-GDP ratio may involve lower borrowings from the bond market, this official added.
Efforts to reduce the debt-to-GDP ratio of the Union as well as state governments come at a time when debt levels of the latter are seen rising further.
According to a National Council of Applied Economic Research study released last month, more large states may cross the 40 percent debt-to-GDP level by 2027-28, with Punjab likely to exceed the 50 percent mark in a business-as-usual scenario. The Fiscal Responsibility and Budget Management (FRBM) Act recommends a combined debt-to-GDP ratio of 60 percent, with 40 percent for the central government and 20 percent for state governments.
The study revealed that nearly half of the 20 large states in the country had witnessed a 10 percent or more jump in their debt-to-GDP levels between 2012-13 and 2022-23.
More states are of late expected to rely heavily on revenue spending thanks to the several cash transfer schemes and welfare programmes they announced in the run-up to elections, according to economists.
The central government, on its part, has unveiled plans to target a fiscal deficit that will bring down its debt-to-GDP ratio in the 49-51 percent range between 2026-27 and 2030-31.
The Centre’s debt, based on the FRBM Act definition, was estimated to be at 57.1 percent of GDP as per the revised estimates for 2024-25 and is seen at 56.1 percent in 2025-26.
Finance Minister Nirmala Sitharaman last month said that the government is using almost the entire borrowed resources for financing effective capital expenditure in FY26. “So, the borrowings are not going for revenue expenditure or committed expenditure, or any of those kinds,” she said.
Sitharaman added that while the effective capital expenditure in FY26 amounts to 4.3 percent of GDP, the fiscal deficit target is estimated at 4.4 percent for the next fiscal.
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