Up to 80% of State Revenues Spent on Free Schemes, Salaries and Pensions
Over the past decade, free welfare schemes and subsidies have become a conditional formula for winning political power in Indian states. However, the deteriorating financial health of states has emerged as a major side effect of this approach.
Many states are left with little funding for essential infrastructure such as electricity, roads, and housing. An analysis of state revenues and expenditures shows that after meeting key obligations like subsidies, salaries, pensions, and interest payments, states are left with only 20–25% of their own revenue. In Punjab’s case, just 7% remains for discretionary spending.
This year, Punjab must repay principal debt worth ₹90,000 crore. To manage this, the state will need substantial additional borrowing. Punjab has already raised ₹20,000 crore from the market in October 2025.
Rajasthan faces principal debt repayments of ₹1.50 lakh crore this year. While it has already borrowed ₹32,000 crore, its outstanding liabilities exceed its borrowing limit, forcing the state to borrow further just to repay existing debt.
Bihar May Face Bankruptcy Due to Election Promises
States such as Madhya Pradesh, Rajasthan, Punjab, and Bihar have debt levels close to or exceeding one-third of their Gross State Domestic Product (GSDP). This significantly increases the burden of principal repayments in the coming years.
In Bihar, the financial burden of fulfilling election promises could be 25 times the state’s capital expenditure, raising the risk of bankruptcy.
Large states like Maharashtra and Karnataka spend a major share of their revenues on salaries, pensions, and essential expenses, leaving only a limited amount for development projects.
In Rajasthan and several other states, nearly 45 gigawatts of solar and wind energy capacity remains stalled because governments are unable to sign power purchase agreements.
Widespread Financial Stress Across States
West Bengal: About 21.2% of state revenue is spent on interest payments, which is higher than the combined education and health budget (18.7%).
Rajasthan: Rising debt and interest burdens have kept healthcare spending stagnant.
Madhya Pradesh: Welfare schemes like the Ladli Behna program are increasing the interest burden on state debt.
Karnataka: Guarantee schemes have increased interest payments compared to last year.
Maharashtra: In June, approvals for 903 development projects were cancelled, most of them related to irrigation and dam construction.