States to ease off-budget borrowings amid fiscal discipline push
In FY26, Indian states plan to keep off-budget borrowings stable, marking a shift towards fiscal responsibility. After a surge in off-budget financing during the pandemic, states are now exploring interest-free loans for infrastructure, enhancing transparency and sustainability in managing debt.
New Delhi: After a year of sharp increases, Indian states are expected to keep their off-budget borrowings largely flat in FY26, signaling a shift toward tighter fiscal discipline even amid persisting pressures for welfare spending, according to two people familiar with the matter.
The restraint comes after years of heavy reliance on off-budget borrowings, which had ballooned during the pandemic with both the Centre and states scrambling to finance emergency spendings. Off-budget borrowings by states rose to ₹29,335 crore in FY25 from ₹21,251 crore the year before, finance ministry data shows.
In FY21, at the height of covid-related spending, such borrowings had touched ₹67,181 crore.
“States have been told to enforce fiscal discipline. Even access to the Centre’s 50-year, interest-free loans, which are popular among states, comes with conditions requiring greater financial prudence,” said the first person mentioned above, on the condition of anonymity.
Many states, the person said, are increasingly turning to the Centre’s Special Assistance to States for Capital Investment (SASCI) scheme, which provides long-term, interest-free loans for infrastructure projects, rather than relying on off-budget borrowing mechanisms.
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Off-budget borrowings by states are likely to slow down in FY26, the person added.
On its part, the Centre had itself discontinued off-budget borrowings in FY23. Since FY22, it has tightened rules for states by counting debt raised through state-owned entities, where repayment is backed by state budgets, taxes, or other revenues, toward their overall borrowing limits under Article 293(3) of the Constitution.
States realize hurt to fiscal credibility
“States are realizing that excessive off-budget borrowing undermines fiscal credibility. By reining it in, they not only improve transparency and discipline but also preserve space for future borrowing at lower costs,” said the second person mentioned above.
“Curbing off-budget borrowings also reassures investors and credit agencies that states are serious about managing debt sustainably,” the person added.
There was no response to queries emailed to a finance ministry spokesperson.
A recent report by CareEdge Ratings noted that the budgets of 13 major states, representing 83% of India’s GDP, project an aggregate fiscal deficit of 3.2% of GDP in FY26, broadly in line with the previous fiscal year.
The report also highlighted sharp differences in states’ financial resilience: richer states such as Haryana, Telangana, Karnataka, Tamil Nadu, and Maharashtra finance more than three-fourths of their budgets through their own revenues, while states including Madhya Pradesh, West Bengal, and Uttar Pradesh rely heavily on central transfers.
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In FY25, Maharashtra topped the list of states relying on off-budget borrowings at ₹13,990 crore, followed by Karnataka ( ₹5,438 crore), Telangana ( ₹2,697 crore), and Kerala ( ₹983 crore), according to finance ministry data.
In FY24, Maharashtra had raised ₹7,700 crore through off-budget borrowings, followed by Kerala ( ₹4,688 crore), Telangana ( ₹2,546 crore), Punjab ( ₹1,675 crore), Tamil Nadu ( ₹1,560 crore), and Assam ( ₹1,102 crore).
States often turn to off-budget borrowings to fund welfare schemes and infrastructure without breaching deficit targets or borrowing caps. While this offers short-term flexibility, high borrowings raise concerns over transparency and fiscal discipline. Keeping such borrowings in check will ease debt pressures and help ensure that India’s broader consolidation roadmap stays credible.
States have been increasing their open market borrowings over the past five years. According to finance ministry data, Maharashtra and Tamil Nadu lead the pack, each breaching the ₹1.2 lakh crore mark in FY25, underlining the scale of state-level investment and spending priorities. Karnataka and Uttar Pradesh have also recorded substantial increases. Smaller states, including those in the northeast, have maintained modest borrowing profiles.