Debt sustainability of states in India: An assessment

The debt position of the state governments in India, which deteriorated sharply between 1997–1998 and 2003–2004, has witnessed significant improvement since 2004–2005. Debt sustainability analysis based on empirical estimation of inter-temporal budget constraint and fiscal policy response function in a panel data framework, covering 20 Indian states for the period 1980–1981 to 2015–2016, indicates that the debt position at the state level is sustainable in the long run. The increase in contingent liabilities of states and take-over of large chunk of these liabilities through debt restructuring of State Power Distribution Companies, however, would adversely affect the debt position of states.