A Loan Waiver Rain and a State Fiscal Capacity Drought
Indian states are currently grappling with a paradoxical challenge described as "a loan waiver rain and a state fiscal capacity drought." On one side, multiple states are announcing loan waivers to support farmers, leading to an immediate reduction in their revenue. On the other, state governments are facing fiscal strain with growing deficits, sluggish capital expenditure, and subdued capacity to finance development projects.
Rising Loan Waivers and Their Fiscal Impact
Loan waivers, while politically popular and socially supportive, act as a significant fiscal burden. Many states allocate substantial portions of their budgets to loan waiver schemes and other sops such as free electricity and farm subsidies. Such expenditures crowd out critical investments in infrastructure and social services, constraining the state’s ability to create developmental capital.
State Fiscal Capacity Under Stress
Despite some fiscal consolidation efforts, the overall fiscal health of Indian states remains fragile:
Many states continue to run fiscal deficits exceeding the recommended 3% of GSDP, with some recording deficits closer to 3.2% or more in FY25.
States like Andhra Pradesh, Haryana, Punjab, and Tamil Nadu suffer from persistent revenue deficits, which pressurize their ability to maintain sustainable expenditure levels.
Market borrowings have increased, with states projected to raise ₹10.8 trillion in FY25 to finance deficits, indicating heightened debt levels.
Capital expenditure growth is slowing down, with states like Bihar, Madhya Pradesh, and Maharashtra even anticipating a decline.
Simultaneously, around ₹3 lakh crore of capital expenditure funds remain unspent across top states, showing inefficiencies in fund utilization that could otherwise boost economic growth.
The Fiscal Deficit vs. Development Dilemma
States are caught in a fiscal bind: balancing populist measures such as loan waivers with the need to maintain fiscal discipline. Loan waivers provide short-term relief but reduce states’ revenue base, limiting funds available for capital expenditure that drives economic growth. The decline in capital spending amid widening deficits points to a fiscal capacity drought that could hamper long-term infrastructure development and service delivery.
Key Challenges and Needed Actions
Fiscal consolidation: States must prioritize reducing deficits through prudent expenditure management and improving tax revenues.
Improved capital spending: Efforts are needed to release and efficiently deploy unspent capital expenditure funds to stimulate economic activity.
Targeted sops: Rationalizing waivers and subsidies to focus on sustainable welfare without derailing fiscal capacity.
Debt management: Strengthening fiscal credibility and managing debt growth to ensure sustainable borrowing costs.
The Reserve Bank of India has highlighted rising subsidy burdens and expanding contingent liabilities as emerging risks requiring strategic corrective measures to restore fiscal stability.
Frequently Asked Questions
Why do loan waivers strain state finances?
Loan waivers immediately reduce state revenue while increasing expenditure, shrinking fiscal space available for development and pushing up deficits.
How are Indian states managing rising fiscal deficits?
States are increasingly relying on market borrowings and need fiscal consolidation to keep deficits below 3% of GSDP as per norms.
Why is capital expenditure important for states?
Capital expenditure funds infrastructure and economic growth activities which are crucial for long-term development and employment.
What is causing unspent capital expenditure in states?
Delays in project execution, cash flow management issues, and administrative bottlenecks prevent full utilization of budgeted funds.
How can states balance welfare schemes and fiscal health?
By prioritizing sustainable subsidies, improving revenue collection, and controlling non-merit expenditure, states can maintain fiscal capacity while supporting vulnerable sections.
Published on: July 22, 2025
Published by: PAVAN
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