Poll-bound states spent carefully while cutting debt

Poll-bound States reduced their outstanding liabilities as a share of GSDP while keeping development expenditure intact signalling fiscal prudence without compromising on welfare

According to data in the RBI State of State Finances report, Assam, Kerala, Tamil Nadu West Bengal and Puducherry, which are gearing up for elections in 2026, consistently reduced their debt by up to 4 percentage points since 2021, when the respective political parties came to power.

Among the five States, however, West Bengal has the highest share of debt in GSDP at 39% as per Fiscal 2025-26 Budget Estimates, according to Reserve Bank of India (RBI) Study of State Budgets 2025. This was, however, down by 4.7 percentage points from 2021.

Kerala cut its outstanding liabilities by 4.8 per centage points to an estimated 35.5% of its Gross State Domestic Product (GSDP). Tamil Nadu’s debt stood at 29.2% of the GSDP. Assam had a 28% of GSDP in debt and Puducherry, a Union Territory, at 26% of GSDP in 2025-26.

The politicial parties in the respective States had come to power in the middle of the COVID lockdown, when economic activity was tepid and the governments prioritised mitigation measures over business-as-usual development activities. While the States reduced the share of debt in comparison with the size of their economies, the ratio continued to stay above the FRBM Act prescribed limit of 20%. To be sure, the metric to measure borrowing of States has been consistently above the FRBM mark since 2016. RBI in its State budget study report said this was also consistent with the increase in global government debt burden.

Recent debates between political leaders in Tamil Nadu about the State’s debt situation drew attention to the topic. While the critics used the nominal debt numbers to signify fiscal stress, the representatives of the ruling parties regularly rebutted saying this was not a problem as they were spent on welfare and development.

To be sure, spending on development, social sector and capital outlay in the five states either declined marginally or stayed consistently below the overall number.

For instance, West Bengal, the most indebted in the lot, spent 10.3% of its GSDP on development expenditure in 2023-24. In 2025-26, it budgeted this component at a higher 12% of its GSDP. Similarly, Kerala and Tamil Nadu have consistently maintained capital outlay as a share of GSDP at about 1% and 1.9% in the past three fiscals. Assam has spent not more than 11% of GSDP on social sector spending in the past three years.

Development/non-development expenditure

“All expenditures relating to revenue account, capital outlay and loans and advances are categorised into social services, economic services, and general services. While social and economic services constitute development expenditure, expenditure on general services is treated as non-development expenditure,” RBI said in its methodology note.

RBI also said that while at the surface States are not in a crisis, different States are in varied demographic stages and that will have a disproportionate effect on fiscal pressure. Kerala and Tamil Nadu have a fifth of the population above the age of 60. “Youthful States may harness their demographic dividend by strengthening human capital investments, intermediate States may balance growth priorities with early preparation for aging, and ageing States may enhance revenue capacity alongside healthcare, pension and workforce policy reforms,” said RBI in its study.