A recent study by the IMF reveals that hidden debt is becoming a growing global problem, threatening the economic stability of countries across the world, particularly low-and-middle-income countries (LMICs), including India.
LMICs are especially vulnerable due to their limited fiscal buffers, which exacerbate the long-term economic risks posed by undisclosed liabilities and non-transparent financial practices. Hidden debt practices include off-budget borrowings, undisclosed contingent liabilities and obligations undertaken by state-owned enterprises and special purpose vehicles which globally is predicted to be reaching a total of $1 trillion.
These practices have blurred the actual financial position of governments, making it difficult for policymakers, investors and international institutions to assess the true fiscal health of a nation.
As IMF data suggests, higher fiscal opacity can result in a rise in sovereign bond yields and it could go as high as 50 basis points. This increased cost of borrowing not only makes it harder for countries to manage existing debt but also limits their ability to fund crucial infrastructure and social programs.
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For instance, the World Bank estimates that LMICs require 1.5 trillion dollars in infrastructure financing by 2030 to meet developmental goals which roughly is around 4.5% of GDP for LMICs. However, hidden debt practices significantly reduce access to affordable credit which either leaves essential projects underfunded or incomplete. This further hampers long-term economic growth and social development.
In India, the hidden debt challenge is particularly pronounced and requires more immediate acknowledgment and addressing. The country’s current public debt stands at approximately 83% of GDP, a level that is projected to remain around 83.6% until 2027-28, according to IMF estimates.
While this figure already signals significant fiscal stress, the reality could be far worse due to extensive off-budget borrowings. These financial obligations, incurred outside the formal budget through public sector enterprises and special purpose vehicles, create unforeseen fiscal pressures that remain undisclosed in headline fiscal deficit figures.
India’s declining rank in the fiscal transparency index further underscores the gravity of the situation, which the Union government has failed to address so far. Since 2014, the country’s position on the index has fallen significantly, reflecting a growing lack of accountability and transparency in its fiscal practices. This decline not only raises questions about governance but also erodes investor confidence and complicates efforts to attract foreign capital to ensure financial stability.
Hidden debt practices compromise India’s ability to maintain fiscal discipline while meeting its developmental aspirations, making the need for structural reforms more urgent than ever.
India’s fiscal transparency scores. Source: International Budget Partnership
Hidden debt grows silently during economic booms when people and businesses borrow more, expecting the good times to last. When we shift our focus specifically to the Indian states, we notice how often this happens with states spending heavily on projects or companies taking big loans. But during a slowdown, repayments become harder which exposes the hidden debt causing financial distress across sectors.
States like Punjab and Rajasthan have increasingly resorted to this practice to fund welfare schemes and power subsidies. While such measures provide short-term relief and support for developmental expenditures without inflating the reported fiscal deficit, they come at the cost of postponing financial burdens – a concern earlier echoed by Reserve Bank of India (RBI) as well.
The debt deferral of accountability increases the risk of future repayment crises, particularly as interest obligations mount and revenue streams remain insufficient to bridge the gap.
Telangana presents a striking example of this trend. By 2021, the state’s off-budget liabilities totalled Rs 97,940 crore, representing nearly 10% of its gross state domestic product (GSDP). A significant portion of this debt was tied to large-scale projects such as the Kaleshwaram lift irrigation project, which alone accounted for over Rs 50,000 crore of borrowings.
These projects, while crucial for development, reflected the state’s heavy reliance on non-transparent borrowing to finance capital-intensive initiatives, raising concerns about long-term fiscal sustainability.
Similarly, Andhra Pradesh saw its off-budget liabilities soar to Rs 32,903 crore by 2023-24, with a substantial share tied to state public sector undertakings. For instance, the Andhra Pradesh State Civil Supplies Corporation borrowed Rs 30,181 crore to manage essential commodities. Such practices highlight how extra-budgetary borrowings are often used to address immediate needs without accounting for their future fiscal implications.
Karnataka is another state grappling with hidden debt which has reported off-budget borrowings of over Rs 18,102 crore in 2021. Here too, irrigation projects, particularly those under entities like the Karnataka Bhagya Jala Nigam, consumed a significant share of the borrowings highlighting the reliance on extra-budgetary channels to fund critical infrastructure.
Debt-to-GDP ratios without including off-budget borrowings. Source: CSEP
Kerala, despite having strict debt-to-GSDP limits enshrined in its debt management laws, exceeded its targets by heavily relying on extra-budgetary resources. This highlights how even states with robust legal frameworks struggle to balance developmental aspirations with fiscal discipline.
The off-budget liabilities were significant until recently, with estimates showing Rs 2.79 trillion in 2020-21 and Rs 1.71 trillion in 2021-22 pointing to a widespread and systemic dependence on fiscal sleight-of-hand to fund capital-intensive projects. West Bengal, for instance, reported off-budget liabilities of Rs 3,016.64 crore, which, although lower in absolute terms, still represented 0.23% of its GSDP.
The RBI has repeatedly flagged the risks associated with such practices and warned that they contribute to a growing stock of contingent liabilities. If these liabilities materialise, they could significantly strain state finances, leaving governments unable to meet essential commitments or sustain developmental initiatives.
Extra budgetary debt (non-NSSF liabilities) and repayments (Source: CSEP)
Beyond these fiscal risks, hidden debt also poses cascading implications for India’s social and developmental priorities. Interest payments consume nearly 42% of government revenue, diverting resources away from critical sectors such as infrastructure, education, and healthcare. This fiscal strain makes the upcoming Union Budget 2025 a crucial juncture for addressing these challenges while balancing competing economic and social needs.
As the government works toward adhering to the Fiscal Responsibility and Budget Management (FRBM) Act’s target of reducing the fiscal deficit to 4.5% of GDP by FY26, the budget must reflect strategies to reconcile fiscal discipline with developmental imperatives.
Prioritising social sector spending, especially in healthcare and education, is essential.
Flagship initiatives like Ayushman Bharat and the National Education Policies – digital learning programs require significant funding to achieve their goals. However, with a substantial share of revenues allocated to debt servicing, the government historically has faced limitations in scaling up these critical initiatives.
Moreover, rural safety nets like MGNREGA and the public distribution system (PDS), which serve as lifelines for vulnerable populations, risk budgetary constraints or delays which further exacerbates inequalities and social vulnerabilities.
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India’s focus on capital expenditure to drive growth adds another layer of complexity. Infrastructure projects, which have been central to recent budgets, are increasingly funded through off-budget borrowings, particularly at the state level. This practice not only undermines fiscal transparency but also jeopardises the timely execution of projects due to financing challenges.
The fiscal health of Indian states will significantly influence the budget’s framework. States grappling with high off-budget liabilities, such as Punjab, Rajasthan, and Kerala, are likely to seek increased financial support from the Union government.
The Union government, too, has accrued debt through national organisations like Food Corporation of India (FCI) that have relied heavily on loans from the National Small Savings Fund (NSSF), which added to hidden liabilities. By FY 2022, FCI’s borrowings crossed Rs 3.7 lakh crore.
The chart below sourced from the CAG Union Audit Report (till 2021) shows how the government has accrued liabilities year after year.
Extra budgetary resource utilisation by Union government
However, the Union government’s own created fiscal constraints may limit the scope of such transfers, potentially deepening regional disparities. Introducing conditional grants tied to fiscal transparency reforms could incentivise states to adopt accrual-based accounting and improve debt reporting practices, fostering greater accountability in public finances.
The upcoming budget on February 1 offers an opportunity to initiate measures such as transitioning to accrual-based accounting, establishing a centralised debt management agency, and mandating uniform debt disclosure standards for public sector enterprises.
These reforms are not merely technical adjustments but essential steps toward enhancing fiscal credibility and attracting investor confidence in India’s economic stability for charting a sustainable path for the country’s economic and social development.
Deepanshu Mohan is a Professor of Economics, Dean, IDEAS, and Director, Centre for New Economics Studies. He is a Visiting Professor at London School of Economics and an Academic Visiting Fellow to AMES, University of Oxford.
Ankur Singh is a Research Assistant with Centre for New Economics Studies (CNES) and a team member of its InfoSphere initiative.
This is the third in a series of macro-analyses by the InfoSphere team of Centre for New Economics Studies (CNES). Read the first and second part of the series.