How to arrest deterioration in state finances

States have unsustainable debt levels and it's time for the Finance Commission to amend fiscal rules

The combined stock of debt owed by Indian states is about 21 per cent of gross domestic product (GDP) — excluding UDAY bonds — today and is proliferating unsustainably. Higher borrowing (fiscal deficit) by states, even though it remains within the annual target of three per cent of GDP, threatens the sustainability of sub-national debt at present levels. 

India’s fiscal rule framework imposes legal limits of three per cent of GDP on the fiscal deficits of central and state governments. Adhering to these borrowing limits, though prudent economics, makes for difficult politics as expenditure is curtailed. It is, therefore, a significant