Curbing Freebie Politics: Why India Needs FRBM-Style Law

The Supreme Court’s ongoing scrutiny of “revdi politics” must be matched with legislative action: an FRBM-style law binding both Centre and states to transparent, independently audited fiscal rules.

By P SESH KUMAR

NEW DELHI, September 21, 2025 — The CAG’s latest decadal analysis of state finances makes headlines by showing that state borrowings have tripled in a decade—touching ₹59.6 lakh crore and averaging nearly a quarter of state GDP. Punjab at 40 percent of GSDP is at one extreme, Odisha at eight percent at the other.

The report also underlines breaches of the “golden rule,” where states borrow not for capital assets but to plug day-to-day revenue gaps. On the surface, none of this is startling; RBI, Finance Commissions and economists have long flagged it.

The CAG’s value addition lies in bringing the issue under an audit-anchored frame that forces comparability, highlights golden-rule violations with evidence, and feeds back into Public Accounts Committees with actionable compliance demands. Still, the deeper malaise is political populist “revdi” schemes, pre-election announcements, and pressure on finance secretaries to please their masters.

Crucially, the debate cannot be confined to states. Central government debt has also ballooned, now hovering around 57–58 percent of GDP (₹170–180 lakh crore), with interest payments consuming nearly 40 percent of gross tax revenues. Off-budget borrowings, food and fertilizer subsidy loans parked in special funds, and ever-expanding cesses mirror the very practices for which states are criticised.

When juxtaposed, the Centre’s fiscal profligacy weakens its moral authority to sermonise to states, even though the CAG’s spotlight rightly points to the dangers of using tomorrow’s revenues to pay today’s bills.

Centre vs. States: Who’s Borrowing More Recklessly?

Central Government: Total outstanding liabilities: ~₹170–180 lakh crore (FY23); Debt-to-GDP ratio: ~57–58%; Interest payments: ~39–40% of gross tax revenues.

Off-budget liabilities: Food/Fertiliser subsidy loans, special funds, NSSF borrowings, unpaid subsidies rolled forward

Heavy reliance on cesses & surcharges (outside divisible pool) to service debt

State Governments (all 28 combined): Total public debt: ₹59.6 lakh crore (FY23); Debt-to-GSDP ratio: ~23% (Punjab 40%, Nagaland 37%, West Bengal 34%; Odisha just 8%); Debt-to-Revenue Receipts: 128–191% over the decade (average ~150%)

Breach of golden rule: 11 states using borrowings for day-to-day revenue expenditure.

Pandemic spike: Back-to-back GST compensation loans & special capital assistance packages from Centre

Juxtaposition: The Centre’s debt stock is far higher in absolute terms and as a share of GDP, while states’ excesses lie in quality of borrowing—diverting debt from capital projects to consumption. Put simply: Delhi borrows the most, States borrow the worst.

Centre’s Excesses: Off-budget borrowings through FCI and fertiliser companies; heavy reliance on NSSF; ballooning cess and surcharge collections; interest payments nearing 40% of gross tax revenue; fiscal deficit targets routinely bent.

States’ Excesses: Borrowing (using state PSEs and raising bank loans on state guarantees) to cover revenue deficits; short-term populist schemes without funding plans; weak disclosure of guarantees and contingent liabilities.

Bank Loans Against State Guarantees

State PSEs—especially in power, irrigation, transport, and housing—raise large loans from banks and financial institutions (REC, PFC, HUDCO, NABARD, etc.). These loans are formally on the books of the PSE, but the state government provides an explicit guarantee. Economically, the liability belongs to the state, yet it escapes the fiscal deficit calculation.

Off-Budget Funding of Populist Schemes

Instead of showing free power, farm loan waivers, irrigation subsidies, or housing schemes in the state Budget, governments push these through PSEs. The subsidy bill becomes a bank loan to a utility, while the guarantee sits quietly in the appendix of the Finance Accounts.

CAG’s Warnings

In recent years, CAG audits have repeatedly flagged that states are under-disclosing guarantees, failing to pay guarantee fees, and not provisioning for guaranteed redemption funds. In some cases, even the stock of outstanding guarantees is not fully reported. This is a mirror image of the Centre’s past practice of parking food subsidy arrears in FCI’s borrowings. But the warnings fall on deaf years and the exercise continues.

Scale of the Problem

Power Sector: The biggest offender. State DISCOMs routinely borrow from PFC/REC with state guarantees. In Tamil Nadu, Punjab, and Rajasthan, such loans exceed 10–15% of state GSDP. Bailouts like UDAY (2015) and the more recent schemes show how these contingent liabilities eventually migrate to the state’s own books.

Irrigation Corporations & SPVs: States like Andhra Pradesh, Maharashtra, and Telangana have set up irrigation development corporations which float bonds or borrow from NABARD, all backed by state guarantees. These loans fund politically attractive but fiscally risky irrigation projects, bypassing legislative scrutiny of budget allocations.

Urban Development & Housing: Similar patterns exist with state housing boards and urban local bodies, where state guarantees enable borrowing beyond local creditworthiness.

The Centre and states are mirror images in fiscal gamesmanship. The Union disguised subsidies through FCI-NSSF loans and leaned on cess collections to bankroll its own “revdi”-style welfare optics. States, for their part, funnelled populist expenditure through PSE borrowings and piled up bank loans under state guarantees, bypassing their own FRBM limits. Both practices erode transparency, undermine legislative scrutiny, and leave taxpayers footing the bill when bailouts become inevitable.

Plugging Gaps for Course Corrections

The only workable solution lies in tightening the institutional plumbing and aligning incentives across the Union and the states. The golden rule must be made binding, not advisory, with every rupee of fresh borrowing tagged and disclosed as capital or revenue use in real time.

The Union should extend additional borrowing headroom and interest-free loans only to those states that meet this covenant and publish full fiscal risk statements, including guarantees and unpaid bills. The CAG can reinforce this by qualifying finance accounts for persistent violators, producing annual red-amber-green dashboards on debt quality, and auditing the financing notes behind major subsidies or entitlements.

At the political level, the Supreme Court’s ongoing scrutiny of “revdi politics” must be matched with legislative action: an FRBM-style law binding both Centre and states to transparent, independently audited fiscal rules. Finance Commissions could then calibrate transfers and grants based on compliance.

Ultimately, fiscal credibility will not be restored by reports alone. It requires that both Centre and states stop treating borrowings as a soft option for populist promises and instead make every borrowed rupee sweat by creating durable assets. The CAG has lit up the warning board; whether governments heed it depends on whether Parliament and state legislatures insist on accountability beyond optics.

(This is an opinion piece, and views expressed are those of the author only)

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