UPSC DAW Mains Answer Writing 2025 29th September 2025
Question
Rising fiscal stress among Indian states is a growing concern, as highlighted by recent CAG reports and NITI Aayog’s State Fiscal Health Index. Examine the structural reasons for such stress and suggest reforms to ensure macro-fiscal stability at the state level."
Model Answer
Approach:
Introduction
Brief about the rising fiscal stress among Indian states.
Body
How has the States’ borrowing changed over time?
Why are States borrowing so heavily?
What are the fiscal risks emerging?
How are States coping with fiscal pressures?
Conclusion
Give holistic conclusion by suggesting futuristic measures.
Introduction
India’s federal system relies on States for welfare and development. Post-2000 reforms and tax buoyancy kept their finances healthy, but COVID-19 reversed the trend—revenues fell, spending spiked, and debt soared. For example: Uttar Pradesh’s surplus shrank from ₹37,000 crore (FY20) to ₹2,000 crore, while Kerala’s borrowing of ₹80,575 crore deepened fiscal stress. Once buoyant, States now face mounting deficits and repayment burdens.
Body
How has the States’ borrowing changed over time?
Sharp rise post-pandemic: Borrowings spiked everywhere during the pandemic, with Kerala, Maharashtra, Andhra Pradesh, and Tamil Nadu reporting unprecedented debt levels.
Uttar Pradesh’s decline: From a revenue surplus of ₹37,000 crore in 2019-20, UP fell to only ₹2,000 crore.
Kerala’s crisis: Borrowed ₹80,575 crore between 2020-22 and exceeded ₹1.04 lakh crore later, making it one of the most indebted States.
National trends: From 2017 to 2022-23, States’ gross borrowings rose from ₹5.6 lakh crore to ₹8.2 lakh crore, reflecting widespread fiscal strain.
For example:
Borrowings & Debt Patterns
Borrowing Trends (2016–17 → 2022–23):
Rajasthan: ₹43,889 crore → ₹1,60,565 crore (debt ~40% GSDP).
Tamil Nadu: ₹66,143 crore → ₹1,01,062 crore (~33% GSDP).
Telangana: ₹44,819 crore → ₹1,26,884 crore (~28% GSDP).
Uttar Pradesh: ₹67,685 crore → ₹66,847 crore (~31% GSDP, slightly reduced).
Tripura & Uttarakhand: Borrowings low but debt >30% GSDP.
Pandemic Spike: Borrowings increased universally during COVID; post-pandemic strategies diverged:
Increase: Andhra Pradesh, Rajasthan, Telangana.
Reduce/Cut: Karnataka, Kerala, Maharashtra.
Maintain/Moderate: Odisha, UP, Tripura.
Why are States borrowing so heavily?
Emergency spending: The pandemic forced huge expenditures on health, welfare, and relief, while revenues collapsed.
Welfare paradox: Despite borrowing, States continue with high welfare commitments such as free electricity, pensions, and subsidies.
GST regime pressures: Dependence on GST compensation and delayed transfers added strain to State finances.
Capital expenditure trade-offs: More money went into welfare subsidies than infrastructure, raising concerns of long-term growth stagnation.
What are the fiscal risks emerging?
Debt sustainability: States like Punjab, Kerala, and Rajasthan carry some of the heaviest debt burdens relative to GSDP.
Revenue shortfall: Weak own-tax revenues coupled with GST dependency reduce fiscal space.
Deficit pressures: Gross fiscal deficit (GFD) levels remain elevated, restricting manoeuvrability.
Crowding out growth: Excessive borrowing for subsidies diverts funds from capital creation, weakening long-term competitiveness.
How are States coping with fiscal pressures?
Raising borrowings: Kerala, Maharashtra, and Tamil Nadu remain among the largest borrowers.
Cutting investments: Many States reduced capital expenditure to fund populist schemes.
Seeking Centre’s support: GST compensation and Union transfers remain critical lifelines.
Relying on lotteries and land: Kerala and other States turn to non-tax sources like lottery revenues or land monetisation.
Conclusion
What is the way forward for States’ fiscal health?
Prudent fiscal management: Focus on long-term debt sustainability instead of short-term populism.
Rationalised welfare: Targeted subsidies over blanket schemes to avoid unsustainable fiscal stress.
Strengthened GST framework: Ensure timely compensation and greater autonomy in tax mobilisation.
Balanced expenditure: Redirect focus toward capital creation and infrastructure while safeguarding essential welfare.
While welfare commitments reflect democratic imperatives, unchecked populism coupled with weak revenue growth risks undermining fiscal stability. The future of India’s growth story rests not only on the Centre but equally on how States recalibrate their spending priorities and borrowing practices.
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