Daily Current Affairs for UPSC : 27 Jan 2026/Five Indian States Struggle to Meet FRBM Targets Despite Post-COVID Recovery

Five Indian States Struggle to Meet FRBM Targets Despite Post-COVID Recovery

Recent data from the Reserve Bank of India (RBI) Study of State Budgets 2025 highlights a persistent fiscal challenge: while several major Indian states have successfully trimmed their debt-to-GSDP ratios since the pandemic, they remain significantly above the targets mandated by the Fiscal Responsibility and Budget Management (FRBM) Act.

Why in the News?

The fiscal health of Indian states has returned to the spotlight following the release of the RBI’s 2025 budget study. The report comes amidst heated political debates, particularly in states like Tamil Nadu, where critics point to rising nominal debt as a sign of fiscal stress, while ruling parties defend the borrowing as necessary for welfare and infrastructure development.

Key Points of the RBI Study

1. Debt-to-GSDP Standings (FY 2025-26 Estimates)

Despite a general downward trend in debt shares compared to 2021, most states are still far from the 20% limit prescribed by the FRBM Act.

• West Bengal: Holds the highest debt share at 39%, though this is a 4.7 percentage point improvement from 2021.

• Kerala: Reduced its liabilities by 4.8 percentage points to 35.5%.

• Tamil Nadu: Debt stands at 29.2%.

• Assam: Maintains a ratio of 28%.

• Puducherry (UT): Stands at 26%.

2. The Post-COVID Recovery Context

Most current state governments took office during the peak of COVID-19 lockdowns. During this period, fiscal priorities shifted from “business-as-usual” development to urgent pandemic mitigation and healthcare spending, causing a temporary spike in borrowing that is only now beginning to stabilize.

3. Development vs. Debt

A critical point of the RBI analysis is the quality of spending. While debt levels are high, spending on capital outlay and development remains relatively modest:

• West Bengal: Budgeted development expenditure at 12% of GSDP for 2025-26.

• Kerala & Tamil Nadu: Have kept capital outlay (long-term infrastructure) low, at approximately 1% and 1.9% of GSDP, respectively.

• Assam: Social sector spending has plateaued at roughly 11% of GSDP over the last three years.

4. Demographic Pressures

The RBI warned that fiscal health is not “one size fits all.” Different demographic stages create different types of fiscal pressure:

• Ageing States (Kerala & Tamil Nadu): With 20% of their population over 60, these states face rising costs in healthcare and pensions, necessitating urgent revenue reforms.

• Youthful States: Encouraged to prioritize human capital (education and jobs) to harness the “demographic dividend” before their populations age.

The Bottom Line

While states are making strides in reducing their debt share relative to the size of their economies, the consistent breach of the 20% FRBM mark since 2016 remains a structural concern. The RBI suggests that the path forward requires a delicate balance between growth-oriented spending and preparing for the unique demographic shifts each state faces.