"Rising fiscal deficit during the 21st century has been, by and large, responsible for the surge in public…

Question

"Rising fiscal deficit during the 21st century has been, by and large, responsible for the surge in public debt for the Centre-States in India." Examine.

Ghissu Editorial · Accepted Answer

Rising fiscal deficits, driven by salaries, pensions, subsidies, revenue deficits and shocks like COVID-19, have by and large caused the surge in Centre and State debt, since every deficit is financed by borrowing. Costly market borrowings, now over half of state liabilities, and weak revenue mobilisation have added to it.

**Introduction**

India’s rising fiscal deficit in the 21st century has significantly contributed to the surge in public debt for Centre and States, affecting fiscal sustainability and growth, with ==Telangana== exemplifying these dynamics through its robust GSDP growth yet fiscal pressures. Managing this deficit is crucial as India targets a fiscal deficit of 4.4 percent of GDP by 2025-26 to maintain economic stability.

**Causes and Trends**

1. **Revenue Deficit and Tax Base Issues**: Persistent revenue deficits and a narrow tax base with low compliance have forced higher borrowing. Slow growth in direct tax revenues and tax evasion exacerbate fiscal imbalances, compelling governments to depend on debt.

**Fiscal Deficit and Public Debt**

2. **Centre-State Borrowing Dynamics**: Article 293 restricts state borrowing, leading to higher costs for states like ==Telangana==, which rely increasingly on market borrowings constituting over 50% of liabilities. The Centre’s control over external borrowings often results in states facing higher interest rates than the original loans.

**Implications**

3. **Fiscal Sustainability and Growth Constraints**: Rising debt increases interest payments, crowding out capital expenditure; however, ==Telangana==’s 6.8%⟦1⟧ GSDP growth in 2024-25 shows efficient fiscal management can mitigate risks. High debt burdens limit social and infrastructure spending, risking long-term growth.  
4. **Policy Recommendations**: The 16th Finance Commission⟦3⟧⟦2⟧ and FRBM Review Committee (2017) emphasize fiscal consolidation and operational flexibility to balance debt and growth. Strengthening fiscal responsibility laws and improving debt management are key to sustainable finances.

**Conclusion**

Strengthening fiscal responsibility laws, expanding tax bases via GST and DBT, and improving debt management are essential to ensure fiscal sustainability and economic growth. Prioritizing capital expenditure and enhancing revenue mobilization will help reduce dependence on borrowing and control public debt.

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