India's Public Debt: Is It Sustainable?

Every February, when the Finance Minister stands up in Parliament to present the Union Budget, one number quietly defines the boundaries of everything she can promise: the total outstanding debt of the Government of India. As of the 2026-27 Budget Estimates, the central government's debt stands at roughly 56.1% of GDP. Add state government borrowings, and the combined figure climbs to around 82% of GDP.

That translates to a staggering sum. At India's estimated nominal GDP of approximately Rs 365 lakh crore for 2026-27, the central government alone owes over Rs 200 lakh crore. To put that in perspective, this is more than the entire annual economic output of most countries on earth.

But raw numbers alone do not tell us whether this debt is a problem. Countries routinely borrow to fund infrastructure, social spending, and development. Japan's government debt exceeds 255% of its GDP, and its economy has not collapsed. The United States borrows at 123% of GDP. What matters is not the absolute size of the debt but whether a government can service it without crowding out essential spending or triggering a fiscal crisis. That question -- can India sustainably manage its borrowing -- is what debt sustainability analysis seeks to answer.

Economists do not judge debt sustainability by a single number. A country with debt at 80% of GDP can be perfectly solvent, while one at 40% might be heading for trouble. The critical variable is the relationship between two rates: the interest rate the government pays on its debt (r) and the growth rate of the economy (g).

When g exceeds r -- that is, when the economy grows faster than the cost of borrowing -- the government can stabilize or even reduce its debt ratio without running a budget surplus. The expanding economic pie makes existing debt a progressively smaller slice. This is precisely the dynamic that has worked in India's favour for most of the past two decades.

One of India's underappreciated strengths is that almost 95% of its government debt is held domestically and denominated in rupees. This is a crucial distinction from countries like Argentina or Sri Lanka, where large foreign-currency debt has triggered sovereign crises. When your creditors are your own banks, insurers, and savers, and when you owe them in a currency you control, the risk of a sudden debt crisis drops sharply.

That said, the structure of domestic debt ownership carries its own implications. When commercial banks hold 38% of government securities, it means a significant portion of bank capital is locked up in government bonds rather than being lent to businesses and consumers. Economists call this "financial repression" -- the government effectively captures cheap financing from the banking system through regulatory mandates like the Statutory Liquidity Ratio.

Debt sustainability is not just an abstract fiscal metric. It has a tangible, everyday consequence: interest payments. Every rupee the government spends servicing past borrowing is a rupee unavailable for building schools, staffing hospitals, or laying roads. And the bill is enormous.

The Union Budget 2026-27 allocates Rs 12.74 lakh crore for interest payments alone. To grasp the scale of this figure: it exceeds the entire defence budget, the entire education budget, and the entire health budget combined. Interest payments are now the single largest expenditure line item in the Union Budget, consuming approximately 37% of the central government's net tax revenue.

Put differently, for every Rs 100 the government collects in taxes, Rs 37 goes straight to bondholders before a single paisa is spent on public services. A decade ago, this share was lower, but the pandemic-era borrowing binge has swollen the interest bill. Even as the fiscal deficit narrows, the stock of accumulated debt keeps the interest burden elevated.

Discussions about India's public debt often focus exclusively on the central government, but state borrowing is equally significant and, in some ways, more concerning. Combined state government debt adds another 24-25% of GDP on top of the centre's 56-58%, bringing total general government debt to around 82% of GDP.

Unlike the central government, which borrows in a deep and liquid market for G-Secs, state governments depend heavily on State Development Loans (SDLs) that trade at a spread over central government yields. Fiscally weaker states pay a higher premium, creating a vicious cycle where high debt leads to higher borrowing costs, which in turn leads to even higher debt.

Several states are under acute fiscal stress. Punjab, with a debt-to-GSDP ratio exceeding 45%, spends more on interest and pension payments than on capital expenditure. Kerala's debt has surged partly due to the use of off-budget Special Purpose Vehicles (SPVs) like KIIFB, which borrow against future government revenues. West Bengal, Rajasthan, and Andhra Pradesh round out the list of heavily indebted states.

The 15th Finance Commission flagged this issue directly, noting that many states have breached the 3% fiscal deficit limit set by their own FRBM legislation. Populist spending announcements -- farm loan waivers, free electricity schemes, pension expansions -- often bypass FRBM constraints through creative accounting and off-budget borrowing vehicles.

India has a legal framework for fiscal discipline: the Fiscal Responsibility and Budget Management (FRBM) Act, first enacted in 2003. Its original intent was straightforward -- cap the fiscal deficit at 3% of GDP and progressively eliminate the revenue deficit. Successive amendments and escape clauses have diluted these targets, but the framework remains the benchmark against which fiscal performance is measured.

The N.K. Singh Committee, appointed in 2016 to review the FRBM framework, recommended a more nuanced approach. Instead of fixating on the fiscal deficit alone, the committee proposed a debt anchor: reduce the central government's debt to 40% of GDP and the combined centre-state debt to 60% of GDP by 2024-25. These targets now look aspirational at best. The central government's debt sits at 56-58% of GDP, and the combined figure hovers around 82%.