Finance Secretary Ajay Seth warns states on using borrowings for consumption, urges credit-rated debt papers

The Union Government has said public debt remains “elevated” and cautioned that several states are increasingly using borrowings to fund current expenditure rather than capital investments.

“Some states are moving towards financing current expenditure rather than investing through borrowings,” Ajay Seth, Finance Secretary, said, adding that some of the high-income states are running revenue deficits.

Supporting the Finance Secretary , 16th Finance Commission Chairman Arvind Panagariya observed, “In states, there are some specific ones where the fiscal deficit is rather elevated and some discipline is required there and it will take another 5-7 years, but we will get there.”

Seth also pointed out that the market currently fails to differentiate adequately between fiscally prudent and high-debt states.

“Debt papers of states are treated more or less the same, irrespective of whether the debt-to-GDP ratio is 20% or 50%,” he noted, citing similar yields on government securities (G-secs) of Odisha and higher-debt states.

Seth stressed the need for market discipline and pitched for state debt paper to start getting rated. “Even starting that process of credit rating of state development loans will be an important signal,” he said.

“Perhaps we have to think wherein market discipline and market signal have to be brought into that area, apart from looking forward to the report of the 16th Finance Commission,” Seth observed.

Medium-term challenges

On medium-term challenges, Seth observed that elevated public debt was one of the reasons for India not securing a rating upgrade yet.

A significant portion of tax revenues is currently consumed by interest payments, limiting fiscal firepower.

“Our capacity to withstand another COVID-like crisis is limited at this time,” he stated.

With India’s tax-to-GDP ratio at 18%, Seth emphasised the need to raise this to 20%, which will take 5-7 years more.

(Edited by : Ajay Vaishnav)

First Published: May 2, 2025 9:44 PM IST

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