State borrowings to surge about 18% in Q4 after slowing Q2 GDP growth

States across India—led by West Bengal, Maharashtra, and Karnataka—are set to increase their market borrowings by about 18% year-on-year in the fourth quarter of the fiscal year 2024-25 (Q4 FY25).

According to latest data released by the Reserve Bank of India (RBI), the total market borrowing by states for Q4 FY25 may reach ₹4.73 trillion, up from gross issuances of ₹4 trillion in the year-ago period.

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West Bengal has indicated it will borrow ₹58,000 crore, the highest, followed by Maharashtra ( ₹50,000 crore) and Karnataka ( ₹48,000 crore). These states, along with Uttar Pradesh, Tamil Nadu, and Rajasthan, account for a significant share of the total market borrowings projected for the quarter.

The rise in state borrowings offers hope of a push towards broader economic recovery, following a notable slowdown in India’s gross domestic product (GDP) growth in the past couple of quarters.

At 5.4%, GDP growth in Q2 FY25 marked its slowest pace in nearly two years. Growth during Q1 FY25 stood at 6.7%. In comparison, the previous fiscal FY24 saw India’s real GDP growth at 8.2%. Experts have attributed this sluggishness to reduced government spending and weakening urban consumption trends.

Economists, however, are circumspect on the impact of the borrowings, pointing out that these are primarily for financing the deficits of the states, and for managing their revenue expenses, such as salaries, subsidies, pensions, etc.

Key borrowers lead the pack

West Bengal’s indication to borrow ₹58,000 crore in Q4 FY25 is sharply higher than the ₹34,500 crore it had raised in the same quarter in the previous fiscal year. Maharashtra is slated to borrow ₹50,000 crore in Q4 FY25, around the same level as the year-ago period, and Karnataka ₹48,000 crore, down from ₹54,000 crore in Q4, FY24.

Other notable borrowers include Tamil Nadu, Madhya Pradesh, Uttar Pradesh and Telangana. Madhya Pradesh has indicated gross issuance of ₹45,000 crore in Q4 FY2025, which is significantly higher than the ₹29,500 crore the state borrowed in Q4, FY24.

Madhya Pradesh has also indicated it will borrow ₹45,000 crore, compared to about ₹18,000 crore in Q4 FY24.

Meanwhile, Uttar Pradesh has said it will borrow ₹36,000 crore compared to ₹29,000 crore in Q1 FY24, and Telangana plans to raise ₹30,000 crore in Q4 FY25, more than double the amount it borrowed in Q4 FY24 ( ₹13,750 crore).

Smaller but significant borrowing plans are also projected for Rajasthan ( ₹25,000 crore) and Bihar ( ₹15,500 crore).

Indication vs actual borrowing

To be sure, rating agency Icra has noted that actual borrowings of some states have been much lower than what they have indicated earlier. “The actual borrowings of MP and WB in Q4 FY2024 were equivalent to 40% and 58%, respectively, of their indicated amounts," Icra said in a recent report.

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At the same time, the rating agency noted that the extent of undershooting in the actual borrowings by states in the last quarter of recent years relative to the indicated amount “has been mixed". For example, Icra noted that Telangana’s actual borrowing in the last quarter of a fiscal tends to be higher than indicated.

“If these states borrow in line with the past trends, we expect the actual borrowing of MP and WB to trail the indicated amount by 20-40%," Icra said in its report.

"Interestingly, several states, including Uttar Pradesh, Karnataka and Rajasthan have indicated a modest step-down of up to ₹75 billion ( ₹7,500 crore) in Q4 FY2025 relative to the actual issuances in Q4 FY2024, while Chhattisgarh has indicated a relatively larger drop of ₹170 billion ( ₹17,000 crore)," it added.

Implications for the economy

The surge in state borrowings comes at a critical juncture for the Indian economy. With GDP growth slowing and private consumption under pressure, the anticipated rise in state-level capital expenditure could support the broader economic recovery.

Economists suggest that state investments in infrastructure, social welfare, and other key sectors could help offset the growth slowdown.

At the same time, they don’t see much impact of the borrowing on GDP growth. “While the market borrowings of the Union government are front-loaded, the state government’s market borrowings are higher in the last quarter. This phenomenon is not new but has been a trend. The market borrowings are linked to the state fiscal deficit and fall within the norms provided by the Union government," said Devendra Kumar Pant, chief economist and head of public finance at India Ratings and Research,

“The impact of higher state borrowings is unlikely to have a significant impact on GDP growth. The deficit, be it Union or the states, has to be financed and the market borrowing is a major source of deficit financing both for union and states. The states with low revenue growth and high deficit have permanent pressure on the fiscal profile of the government," he added.

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"Growth will rise but to a very limited extent because most of these incremental borrowings will be dissipated in revenue expenses and not used for the creation of durable productive assets," said Manoranjan Sharma, chief economist, Infomerics Ratings and former chief economist at Canara Bank.

Sharma also felt that the increased reliance on borrowings raises concerns about state-level fiscal health.

“Higher borrowing is a stark manifestation of the fiscal crisis in several states and underscores that there is a compelling need for fiscal balance and prudence. The fiscal problem will be exacerbated if the borrowings rise and revenue collections fail to achieve the projected level. This mismatch will have wide-ranging ramifications and repercussions on the sustained growth of the states, including inter-generational equity," he added.