Indian states are increasingly feeling the pinch of fiscal stress, as a surge in election-driven promises strains their financial resources. The practice of offering populist measures to attract voters is not new, but its escalating scale is now threatening the economic stability of several states. These promises, ranging from cash handouts to subsidized services, are compelling states to borrow more, potentially jeopardizing their long-term financial health and forcing them to cut back on essential capital expenditures.
One of the most visible impacts of these election promises is a surge in direct benefit transfers (DBT), particularly to women, with Crisil estimating a rise of ₹1 lakh crore due to election commitments. While such schemes can lead to increased voter turnout and immediate relief for beneficiaries, they place a significant burden on state finances. For instance, in the recent Bihar elections, a ₹10,000 cash grant to women was credited with boosting female voter turnout and contributing to the ruling alliance's victory. However, economists caution that such measures could have serious fiscal implications, potentially requiring the state to rely on additional debt financing.
The consequences of prioritizing short-term electoral gains over fiscal prudence are becoming increasingly apparent. A recent CareEdge Ratings report projects that the aggregate debt of Indian states will reach ₹94.4 lakh crore by March 2025, accounting for 32.7% of their combined Gross State Domestic Product (GSDP). This debt is expected to further climb to ₹103.6 lakh crore by FY26, fueled by growing revenue deficits and increased capital expenditure. The Reserve Bank of India (RBI) has also flagged the rising burden of subsidies on state-level debt as a key emerging concern, warning that states need to rationalize their subsidy outlays to avoid crowding out more productive expenditure.
Several states already exhibit high debt-to-GSDP ratios, raising concerns about their ability to manage their economies effectively. Smaller states like Arunachal Pradesh, Nagaland, and Meghalaya have some of the highest debt-to-GSDP ratios, often exceeding 40%, due to their limited economic size and revenue bases. Jammu and Kashmir tops the list with a debt-to-GDP ratio of 51% in FY 2025-26. Larger states like Punjab and Himachal Pradesh also report elevated debt ratios, largely due to rising subsidy burdens, low tax revenue mobilization, and persistent deficits in public sector undertakings.
The fiscal strain caused by election promises is forcing states to make difficult choices. Some states are reducing allocations for key welfare schemes, while others are delaying payments to employees. Capital outlays, which have a higher multiplier effect and can stimulate increased investment in the economy, are often the first to be sacrificed. This can have long-term consequences for infrastructure development, job creation, and overall economic growth.
To address this growing problem, experts emphasize the need for better planning and fiscal discipline. States need to focus on improving their revenue collection, reducing wasteful expenditure, and prioritizing investments that will boost long-term economic growth. The central government can also play a role by providing financial assistance and incentivizing states to adopt prudent fiscal policies. Ultimately, a sustainable solution requires a shift away from indiscriminate election populism towards a more balanced approach that prioritizes both welfare and fiscal responsibility.
