The Debt Trap or a Data Mirage? Re-evaluating India’s Fiscal Glide Path

The Reserve Bank of India’s latest directive asking states to outline a “clear glide path” for reducing public debt has triggered a fresh round of debate in policy circles. On the surface, the numbers appear reassuring. Aggregate state debt-to-GDP has declined from a pandemic-era peak of nearly 31% in FY21 to a projected 29.2% in FY25, suggesting that India’s sub-national finances are stabilising after years of stress.

But a closer look raises an uncomfortable question: Is this fiscal improvement real—or is it partly a statistical illusion?

As India prepares to revise the base year for key economic indicators to 2022–23, the way debt sustainability is measured, compared, and enforced could change dramatically. And for regions like the North East, where debt dynamics are structurally different from the rest of India, the implications could be far more severe than headline numbers suggest.

Why the “Glide Path” Matters Now

Debt glide paths are not new to India’s fiscal architecture. Under the Fiscal Responsibility and Budget Management (FRBM) framework, both the Centre and the states are expected to progressively reduce debt ratios to sustainable levels while balancing growth needs.

What makes the current RBI intervention significant is timing.

• State borrowing surged during the pandemic to fund health spending, welfare schemes, and revenue shortfalls.
• Interest rates are no longer benign.
• And fiscal space is shrinking just as states are being asked to invest heavily in infrastructure, climate resilience, and social protection.

In this context, the RBI’s insistence on clarity is less about optics and more about credibility. However, upcoming statistical changes threaten to blur that clarity.

The Base-Year Shift: Stability on Paper, Ambiguity in Practice

From the next fiscal cycle, India will shift the base year for calculating GDP, Index of Industrial Production (IIP), and Consumer Price Index (CPI) to 2022–23. Technically, this is overdue. Economies evolve, consumption patterns change, and statistical systems must keep pace—especially after a shock as disruptive as COVID-19.

Yet for debt analysis, this shift introduces three critical complications.

The Denominator Effect

Debt-to-GSDP ratios are highly sensitive to the size of the denominator—nominal GSDP. If the revised base year increases the relative weight of services, digital activity, or formalisation gains, the nominal size of state economies could rise sharply.

The result?
Debt ratios may appear lower even if absolute debt levels remain unchanged.

In simple terms, states could look fiscally healthier without repaying a single rupee of debt. While this does not invalidate the data, it complicates fiscal interpretation.

A Break in the Time Series

For states attempting to demonstrate fiscal discipline over time, the base-year change creates a break in historical comparability.

Comparing debt ratios from FY20 (old base) with FY26 (new base) becomes an apples-to-oranges exercise. This weakens the ability of analysts, investors, and even legislators to assess whether a state has genuinely adhered to its glide path—or merely benefited from statistical recalibration.

FRBM Targets and Accountability Gaps

Most FRBM targets are anchored to specific debt-to-GSDP thresholds. A significant statistical revision may require formal recalibration of these benchmarks, possibly even legislative amendments at the state level.

Until that happens, there is a risk of a temporary accountability vacuum, where fiscal outcomes look compliant on paper but lack real-world validation.

The North East Reality: When Small Denominators Become Big Risks

National averages often mask regional stress—and nowhere is this more evident than in India’s North Eastern states.

While large industrial states can absorb higher absolute debt due to diversified revenue bases, the North East operates under a very different fiscal reality.

High Dependency, Structural Debt

Most North Eastern states consistently record debt-to-GSDP ratios in the 30–35% range, sometimes higher. Unlike manufacturing-heavy states, this debt is not driven by expansionary capex or industrial investment but by structural dependency.

• Own tax revenue remains limited
• Central transfers and Article 275(1) grants form the backbone of state finances
• Even routine expenditures require borrowing support

The “Special Category” Paradox

Ironically, generous central funding can itself worsen debt metrics.

Under many centrally sponsored schemes, the Centre bears up to 90% of project costs, leaving states to fund the remaining 10%. For small economies like Mizoram or Nagaland, even this modest share often requires market borrowing.

Because their GSDP base is small, even minor loans cause sharp spikes in debt ratios, making fiscal consolidation appear perpetually out of reach.

Infrastructure Push Without Immediate Payoff

The North East is currently witnessing a massive infrastructure drive—highways, rail connectivity, and logistics corridors aimed at long-term integration with the national economy.

While economically necessary, these investments do not translate into immediate GSDP expansion. The result is a dangerous lag: debt rises today, while growth materialises years later.

Without careful sequencing, states risk being trapped on a “glide path” that never quite lands.

Beyond Headline Debt: The Hidden Pressures

Headline debt figures often tell only part of the story. Two less visible factors are becoming increasingly important in assessing fiscal health.

Off-Budget Borrowings (OBBs)

To stay within borrowing limits, several states have routed debt through State Public Sector Undertakings (SPSUs), effectively keeping liabilities off their balance sheets.

Fiscal observers increasingly expect these borrowings to be scrutinised more closely in the future. Any move to consolidate OBBs into official debt could push some states’ debt ratios up by 3–5 percentage points overnight, dramatically altering their fiscal profile.

The Quality of Debt Matters More Than the Quantity

Not all debt is equal.

A worrying trend across several states is the rising share of interest payments in revenue receipts. In fiscally stressed states, interest obligations now consume a substantial portion of revenues, crowding out spending on health, education, and growth-enhancing infrastructure.

When borrowing is used to service old loans rather than create productive assets, states risk entering a primary deficit trap—a vicious cycle where debt sustains debt, rather than growth diluting debt.

From Ratios to Resilience: Rethinking Fiscal Sustainability

The upcoming base-year revision may offer states a temporary statistical cushion. But for policymakers, lenders, and citizens alike, the focus must shift beyond headline ratios.

What truly matters is debt sustainability:

• Can states service interest without compressing essential spending?
• Are borrowings translating into future revenue capacity?
• Is economic growth broad-based enough to expand the denominator organically?

For the North East in particular, the solution is not simply debt reduction but denominator expansion—building local productivity, private investment, and revenue capacity at a pace that makes debt manageable.

Without that, the glide path risks remaining what it already is for many states:
a well-designed fiscal concept struggling to survive messy economic realities.