Fiscal consolidation has become a top priority for the Union government in the upcoming financial year. Last week, the government urged state governments to curb their revenue expenditure, as it remains one of the significant avenues where public funds are directed.
These efforts come as part of a broader strategy to lower the overall debt-to-GDP ratio of both the Centre and the states by improving the quality of expenditure. According to a study by the National Council of Applied Economic Research, several large states may surpass the 40% debt-to-GDP threshold by 2027-28, with Punjab likely exceeding 50% in a business-as-usual scenario. The Fiscal Responsibility and Budget Management (FRBM) Act prescribes a combined debt-to-GDP ratio of 60%, with 40% allocated to the central government and 20% to state governments.
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Rising state debt a growing concern
Nearly half of India’s 20 large states witnessed a 10% or more increase in their debt-to-GDP levels between 2012-13 and 2022-23. Economists predict that more states will increasingly rely on revenue spending due to the numerous cash transfer schemes and welfare programs announced in the run-up to elections. Consequently, state governments’ debt levels are expected to rise further.
A key objective is to moderate the Centre’s market borrowings. The Indian government aims to reduce its debt-to-GDP ratio from the current 57.1% to 50% by March 31, 2031. In FY26, the Centre plans to borrow Rs 14.82 lakh crore from the bond market in gross terms, while the government’s effective capital expenditure is projected at Rs 15.48 lakh crore.
Understanding revenue expenditure
Revenue expenditure primarily includes day-to-day administrative costs, subsidies, and interest payments. Unlike capital expenditure, which builds infrastructure for the future, revenue spending does not contribute to asset creation. A disproportionate share of revenue spending limits the government’s ability to invest in critical sectors such as healthcare, education, and infrastructure—key drivers of long-term economic development.
In the 2025 Union Budget, total expenditure is estimated at Rs 50.65 lakh crore, with approximately Rs 11 lakh crore allocated for capital expenditure. Clearly, India is spending more on operational costs rather than infrastructure development. Ideally, the revenue deficit—the gap between the government’s regular income and routine expenditures—should be eliminated to ensure fiscal sustainability.
India’s fiscal deficit has long been a cause for concern, with high revenue spending as a major contributing factor. Interest payments alone consume a significant portion of the budget, limiting resources available for developmental projects. Controlling revenue spending is, therefore, crucial for achieving fiscal consolidation and maintaining financial prudence.
Drivers of revenue deficit
India’s sizable public sector workforce significantly contributes to its high revenue expenditure. A substantial portion of government spending goes toward salaries and wages. Even at a conservative estimate of 8% of total employment, the public sector’s payroll burden remains immense. The costs will likely escalate further, especially with education—accounting for 30% of public sector jobs—remaining a necessity and the increasing demand for expanded healthcare services.
Although India spends a smaller percentage of its GDP on public sector wages (5.5%) compared to the US (9.5%) and the global average (9.8%), the sheer size of its population results in a substantial payroll burden. While some argue that India has a relatively low proportion of public administration jobs, when adjusted for population size, the numbers still surpass those of many other countries, such as Russia, where public sector employment is 45%. Additionally, India’s vast informal economy, where many workers lack social security, indirectly places more pressure on the public sector.
Subsidies play a crucial role in supporting vulnerable populations. However, inefficiencies in India’s subsidy programs often lead to fiscal leakages and resource misallocation. Rationalising subsidies, particularly through better-targeted direct benefit transfers (DBT), can help reduce unnecessary expenditures while ensuring that benefits reach the intended recipients.
Lessons in fiscal management
Governments worldwide are implementing measures to optimise public sector spending. In the United States, the Department of Government Efficiency (DOGE), under the leadership of Elon Musk, has undertaken initiatives to downsize the government apparatus. While the US model may not be directly applicable to India, there is a clear need for India to rationalise its public spending. More than just reducing headcount or expenditure, the focus should be on improving the quality of governance and ensuring that public funds are utilised effectively.
For sustainable economic growth, the government should prioritise capital expenditure over revenue expenditure. Borrowings should be directed toward infrastructure and development projects rather than covering salaries and other recurring expenses. By enhancing the quality of public spending, the government can achieve better economic and social outcomes, improving citizens’ well-being in areas such as healthcare and education.
Fiscal discipline and efficient resource allocation must remain at the forefront of policy decisions. By focusing on long-term development goals and ensuring the effective use of taxpayer money, India can maximise its economic potential and enhance the welfare of its citizens.