A rising challenge to fiscal transparency, Indian states increasingly rely on off-budget borrowing, complicating true assessment of public debt amid calls for reform and better disclosure practices.
India’s state finances are under growing pressure to become more transparent, as off-budget borrowing and accounting practices continue to blur the real picture of public debt, according to a Business Standard editorial and a recent World Bank study prepared for the Sixteenth Finance Commission. The central concern is not simply how much states borrow, but how much of that borrowing is shifted outside the formal budget through state-run companies, special purpose vehicles and other government-controlled entities.
The World Bank said such liabilities are often ultimately serviced by state governments through grants, guarantees or earmarked revenues, even when they do not appear on the official balance sheet. In its report, the bank found that Andhra Pradesh, Telangana, Kerala and Tamil Nadu relied heavily on off-budget borrowing between 2021 and 2023, with such debt amounting to 0.6% to 4% of gross state domestic product. The report argued that this practice weakens the credibility of headline fiscal numbers and makes it harder to assess the true strain on state finances.
According to the bank, the problem is compounded by uneven disclosure across states, a weakness that successive Finance Commissions and the Reserve Bank of India have already flagged. The RBI has urged a broader, risk-based fiscal framework that would require governments to disclose off-budget borrowing, guarantees, contingent liabilities and pension obligations in regular fiscal risk statements. The World Bank also pointed to Karnataka as a useful example, noting that the state moved in 2014 to bring borrowing by public-sector undertakings and special purpose vehicles into its own liability accounting.
The editorial also highlighted how classification choices can distort fiscal data. The Comptroller and Auditor General has found instances in which states booked routine revenue spending as capital outlay, reducing reported revenue deficits while inflating capital expenditure. The use of the residual accounting label “Minor Head 800 – Other Expenditure” has added to the opacity, with grants used to service off-budget loans often parked there, making it difficult for legislators, investors and citizens to trace how money is actually being spent.
The broader policy issue is that nearly two decades after states adopted fiscal responsibility laws, debt burdens remain uneven and, in some cases, stubbornly high. A separate World Bank assessment for the Finance Commission said Kerala, Punjab, Rajasthan, Andhra Pradesh and West Bengal still face elevated debt and persistent revenue gaps, while recent tightening by the Centre has pushed states to curb off-budget borrowing. The case for reform now, the editorial argued, is for a transparent reporting framework that captures the full set of risks rather than relying on a narrow focus on deficit targets.
Disclaimer: This article is intended to inform and educate, not to recommend or endorse any financial product, investment or strategy. Please consider your own financial circumstances and seek professional advice where appropriate before making financial decisions.
