Debt Crisis: Mortgaging Tomorrow for Yesterday’s Applause

States known in past as success stories are floundering as politics of populism as seen in the data turn them into fragile economies.

By P SESH KUMAR

NEW DELHI, September 27, 2025 —The Comptroller and Auditor General’s (CAG) State Finances 2025 publication, anchored to 2022–23 data, offers a decadal tableau of fiscal health. Yet by the time it landed in September 2025, much of the picture had already blurred.

Telangana, celebrated in the report as a surplus state, had by mid-2024 slipped into fiscal distress—employees unpaid, contractors protesting, and high-interest loans rescheduled in desperation. Other states, too, had shifted course: West Bengal trapped in structural deficits, Kerala exposed after grants ended, Andhra Pradesh continuing its norm-defying borrowing binge, and Uttar Pradesh displaying surpluses that mask weak human development outcomes.

While surpluses vanish, late reports blunt accountability as it becomes incumbent for structural fixes for fiscal federalism to be more than a fragile promise.

Telangana: From Surplus Darling to Fiscal Patient

Telangana epitomises the danger of snapshots frozen in time. In the CAG’s 2025 publication, its FY 2022–23 accounts gleam with revenue surplus. In reality, subsidies had already hollowed out that cushion. By mid-2024, the state staggered under the weight of free power, irrigation subsidies, and populist schemes.

Salaries and pensions were delayed; contractors queued in vain. The government pleaded with the Union to reschedule ₹25,000 crore of high-interest debt—palliative relief for a chronic illness.

Behind the crisis lay opaque off-budget guarantees and insolvent special-purpose vehicles (SPVs) whose obligations sat outside the fiscal deficit headline. Political compulsions made subsidies untouchable.

In the words of a Hyderabad economist, the state had “mortgaged its tomorrow for yesterday’s applause.” Telangana’s tumble demonstrates how ambition plus opacity plus populism can collapse even an enviable balance sheet.

West Bengal: A Structural Sinkhole

West Bengal’s story is less about sudden collapse than stubborn imbalance. For years, the state has run revenue deficits of around 1.7% of GSDP. The CAG’s 2022–23 snapshot confirms this, but more importantly, the persistence of the gap through 2023–24 and 2024–25 proves the deficit is structural, not cyclical.

The roots lie in chronic under-mobilisation of revenue, rigid salary and pension bills, and a politically constrained tax base. Even when economic cycles improve, the deficit does not shrink.

This exposes the inadequacy of decade-average reporting; the underlying problem is not a fluctuation but a locked-in imbalance that requires fundamental reforms in revenue classification, tax policy, and expenditure prioritisation.

Without these, deficits are baked in year after year, regardless of growth or transfers.

Kerala: The Grant-Illusion Exposed

Kerala’s fiscal position illustrates the fragility of welfare-driven models once external support vanishes. During 2022–23, the state benefited from central revenue-deficit grants, which cushioned its books. But when these grants ended, Kerala’s deficit more than doubled, leaving it suddenly exposed.

The welfare state’s commitments—to pensions, healthcare, subsidies, and education—are politically entrenched. Yet the tax base is narrow, with remittances stoking consumption but not yielding commensurate state revenues. Once the grants disappeared, the gap widened into a chasm.

The lesson is stark: transfers can mask weakness, but they do not solve it. Kerala’s fiscal sustainability requires deepening its own-tax effort, rationalising pensions, and aligning subsidies with genuine social targeting. Otherwise, the state risks lurching from grant to grant, with every withdrawal of external support triggering a fresh crisis.

Andhra Pradesh: Breaching as Habit

If Telangana’s collapse was sudden and Kerala’s exposure abrupt, Andhra Pradesh represents chronic fiscal indiscipline. For years, the state has treated the 3% fiscal-deficit norm as optional. The CAG’s 2022–23 snapshot shows fiscal deficits of 4.2–4.3% of GSDP, and both revised and budgeted estimates for 2023–24 and 2024–25 replicate the breach.

This is not an accident but a policy choice. The government has persistently borrowed for revenue expenditure—salaries, subsidies, and populist schemes—rather than capital formation. The habit undermines credibility with lenders, raises borrowing costs, and crowds out investment in infrastructure.

Andhra Pradesh’s rolling breaches demonstrate how norms lose bite when repeated violation goes unchecked. Unless accountability mechanisms—through legislatures, finance commissions, or the CAG—translate breaches into consequences, the rule of law in fiscal matters erodes into a culture of impunity.

Uttar Pradesh: Surpluses That Conceal

At first glance, Uttar Pradesh appears the model pupil: a revenue surplus of ₹74,000 crore, as reflected in 2022–23 and unchanged in 2023–24 and 2024–25. Yet a closer look shows the surplus leans heavily on Union transfers. Own-tax revenue mobilisation remains weak, particularly in relation to the state’s size and potential.

More troubling is the disconnect between surpluses and social outcomes. Uttar Pradesh continues to lag behind national averages in human development indices—health, education, sanitation, and nutrition. In effect, the surplus conceals as much as it reveals. Without translating headline gains into social progress, fiscal health remains an illusion for the citizen.

The CAG’s Time-Lag Problem

Together, these five cases expose the central weakness of the State Finances 2025 publication. Released in September 2025, it analyses data frozen at March 2023. In those two years, Telangana fell from surplus to crisis, Kerala doubled its deficit, and Andhra perpetuated breaches. The result is a fiscal atlas that is historically valuable but of little real-time use to policymakers.

This is not inevitable. With Integrated Financial Management Information Systems (IFMIS), the Union’s Public Financial Management System (PFMS), and state-level treasuries now digitised, the data for near-real-time reporting exists. The CAG’s challenge is not collection but compression of its reporting cycle. Legislatures need fiscal signals live, not two years stale.

Quarterly or half-yearly updates, even if provisional, would transform the CAG’s fiscal role from archivist to watchdog. Without this, accountability always chases yesterday’s balances while today’s crises run ahead unchecked.

Curing the Ills: Structural Remedies

Beyond faster reporting, each state must confront its own weaknesses:

Telangana must unwind opaque off-budget liabilities and confront the unsustainability of perpetual freebies.

West Bengal needs to plug structural revenue gaps and adopt transparent classification.

Kerala must rationalise pensions and deepen its tax base to sustain welfare without perpetual grants.

Andhra Pradesh must end its habit of borrowing for revenue expenditure and realign spending toward investment.

Uttar Pradesh must translate surpluses into social outcomes and strengthen its own-revenue effort.

Fiscal federalism cannot endure if surpluses, deficits, and grants are mere accounting shadows detached from social reality. The CAG’s role must evolve from reporting historical numbers to enabling live accountability. States must, in parallel, align ambition with sustainability.

The collapse of Telangana from poster-child surplus to hand-to-mouth existence is the starkest warning. But West Bengal’s entrenched deficits, Kerala’s post-grant exposure, Andhra Pradesh’s habitual breaches, and Uttar Pradesh’s surplus without social dividends all demonstrate the same truth: fiscal health is dynamic, not static.

The CAG’s State Finances 2025 is rich in archival insight but hobbled by time lag. To stay relevant, it must shorten cycles and issue live fiscal alerts. States, for their part, must confront structural weaknesses and move beyond short-term populism. Otherwise, India’s fiscal federalism risks remaining a fragile promise, where yesterday’s applause mortgaged tomorrow’s stability, and where accountability forever lags behind.

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

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