Why State Finances are Feeling the Strain: A Case Study of Three States

Weeks ahead of the recently held assembly elections in Bihar, Prime Minister Narendra Modi launched an entrepreneurship scheme under which ₹10,000 was transferred directly to the bank accounts of 7.5 million women in the state, amounting to ₹75 billion. Funded from the state budget, the move drew sharp criticism after the Bharatiya Janata Party-Janata Dal (United) alliance returned to power, with allegations that the welfare spending was timed to influence voters. 

Cash transfers and large subsidies have become a cross-party election staple across India. What remains less discussed is whether state finances can afford them. 

The Reserve Bank of India’s data shows that the combined debt of states moderated from 31.8% to 28.5% of GDP by March 2024. But it remains sharply above the 20% cap recommended by the Fiscal Responsibility and Budget Management Review Committee. 

Among large states – those with 10 or more Lok Sabha seats - Punjab, Bihar and West Bengal had the highest debt-to-GSDP ratios at the end of March 2024 at 46.7%, 38.9% and 38.3%, respectively. 

A closer look at the budgets of some of the most indebted large states offers a cautionary tale. 

How political giveaways tighten Bihar’s fiscal bind
Bihar’s budget documents of the past few years show steady expansion but little structural relief. The challenge is not just weak revenue generation, but the difficulty of aligning expenditure growth with an expanding yet fragile revenue base.

The state’s revenue receipts rebounded strongly after the pandemic-hit year of 2020-21, particularly in 2021-22, and again in 2024-25 (RE). But revenue expenditure has grown just as fast, if not faster, preventing a durable correction in the revenue balance. Even in years of strong revenue growth, expenditure pressures remained sticky. 

For durable relief, Bihar must expand its own revenue base, improve spending efficiency or reprioritise expenditure growth.

Actual budget data show that Bihar’s revenue receipts are driven overwhelmingly by central devolution and grants. Roughly 70-75% of its revenues come from the Centre, reflecting the state’s narrow economic base.

On the spending side, discretionary room is limited. Between 2019-20 and 2023-24, committed expenditure - salaries, pensions and interest on loans – accounted for 35-40% of revenues. These are politically and administratively difficult to cut. Reducing other revenue expenditure would mean trimming allocations to education, healthcare, social welfare, and transport - an implausible option for India’s poorest state. 

Capital expenditure offers little flexibility either. Bihar’s capital expenditure base is already modest, while infrastructure gaps in roads, irrigation, flood control and urban services remain large. Cutting investments would weaken growth and depress future revenues.

Yet, year after year, capital expenditure bears the adjustment, falling far short of the target. When fiscal pressure builds, investment spending is deferred to stay within limits.

This strategy has costs. Bihar’s debt-to-GSDP ratio rose from 30.9% in 2021-22 to 38.9% in 2023-24, signalling rising dependence on borrowing. 

In this context, politically driven giveaways can further tighten fiscal space. With limited scope to raise taxes or cut essential services, such schemes risk becoming recurring liabilities, adding to borrowing needs, interest costs, and pressure on capital investment.  

How Punjab landed in a debt-expenditure loop
Punjab’s fiscal stress follows a different but equally worrying trajectory. Revenue receipts have grown only gradually in recent years, while revenue expenditure has expanded much faster, resulting in a widening revenue deficit that reflects a deeper structural imbalance.

Budget documents show that between 2020-21 and 2023-24, committed expenditure accounted for 79-86% of the state’s revenue receipts, leaving little room for flexibility.  Borrowing is increasingly being used to fund day-to-day operations rather than capital creation. 

Subsidies compound the strain. Punjab is among India’s highest per-capita subsidy spenders. Subsidy outlays crossed ₹206 billion in 2022-23 and continue to rise, with free electricity for agriculture accounting for nearly half of the total. In 2025-26, power subsidies are estimated at ₹205 billion, roughly 18% of budgeted revenue receipts.

In a state already struggling with high committed expenditure and a large subsidy bill, the poll giveaways accelerate the problem.

When a state spends roughly 80-85% of the revenue on salaries, pensions and interest, only 15-20% remains for public services and investment. The gap is bridged through borrowing, pushing debt higher each year. Punjab’s total debt is projected to reach ₹4.17 trillion by the end of this year.

Debt servicing has emerged as one of the state’s largest annual outflows. Between 2019-20 and 2023-24, combined interest payments and principal repayments rose by 29% to ₹735 billion. 

The result is a reinforcing loop: higher borrowings raise future repayments, which in turn shrink budgetary headroom.

West Bengal: a legacy of high debt and weak tax mobilisation
West Bengal’s fiscal stress stems less from headline giveaways and more from a long legacy of high debt and weak tax mobilisation. Over the past decade and a half, its debt-to-GSDP ratio has averaged above 40%. 

A significant share of past borrowing has financed revenue deficits rather than capital creation, while interest payments alone consume nearly a fifth of revenues.

Around half of the state’s revenue receipts come from the Central government, lower than Bihar’s dependence, but far higher than fiscally stronger states such as Maharashtra, Tamil Nadu, Karnataka, Kerala or Gujarat.

This is striking given West Bengal’s economic scale. In 2022–23, its GSDP was roughly twice that of Bihar’s, yet its own revenue mobilisation remains modest. This gap suggests under-leveraging of economic potential, limiting fiscal autonomy.

Recent expansions in welfare schemes, including direct cash transfers to women, have further narrowed fiscal headroom. Individually, these schemes are smaller than Punjab’s power subsidy, but their cumulative effect constrains investment and debt reduction.

Despite different economic profiles and political choices, Bihar, Punjab and West Bengal illustrate a common dilemma facing many Indian states. Revenues are failing to keep pace with rising committed expenditure, welfare obligations and debt-servicing costs. 

The result is shrinking room for investment, weaker buffers against shocks, and growing reliance on borrowing. 

Budgets across these states send a similar signal - without stronger revenue mobilisation, more disciplined spending and a tilt towards investment rather than consumption-driven outlays, fiscal gaps will continue to widen.