States bumping up against India’s constitutional borrowing limits are increasingly turning to state-owned corporations and special purpose vehicles to raise off-budget debt, masking the real extent of public leverage and stoking concerns of fiscal transparency.
Recent audits by the Comptroller and Auditor General of India (CAG) show a growing pattern among cash-strapped states using such enterprises to bypass annual borrowing limits. In audit reports tabled in Keralam in June and Maharashtra in July, the national auditor warned that such borrowings mask the true level of state debt, while ratings company Crisil Ratings noted in May that entities like the Kerala Infrastructure Investment Fund Board (KIIFB) continue to borrow heavily.
States and Union Territories raised ₹2.04 trillion in gross market borrowings in the June quarter, while net borrowings stood at ₹1.34 trillion, according to the . These figures don’t cover borrowings separately undertaken by state-owned entities. While keeping these loans away from state budgets creates the illusion of fiscal discipline, state governments routinely remain on the hook to service the loans with public funds.
“Borrowing through state-owned entities can create a fiscal obligation even when the borrowing itself does not appear as a direct liability of the state government,” a central government official said on the condition of anonymity.
Under Article 293 of the Constitution, the Centre caps states’ net borrowing ceiling (NBC) at 3% of their gross state domestic product. With states increasingly their budgets, the Centre has begun including those loans within the NBC, shrinking the states’ capacity to raise fresh loans. While a lawsuit by Keralam against the Centre over the matter awaits a final decision, state-level entities continue to borrow heavily, funding capital-intensive infrastructure and popular spending programmes.
CAG audits reviewed by Mint have flagged such borrowings of varying nature and scale in Kerala, Punjab, Assam and Bihar, adding it could threaten long-term debt sustainability if the loans are not transparently disclosed.
Case list
Keralam is a case in point. A CAG audit identified ₹39,230.33 crore of outstanding off-budget borrowings, including ₹13,653.01 crore borrowed in FY25. All these loans were serviced from the state’s consolidated fund. The CAG found a ₹12,669.92 crore gap between the borrowing information furnished by the state to the Union government and actual borrowing for FY25.
A Crisil Ratings report on 28 May said the Kerala Infrastructure Investment Fund Board (KIIFB) had an approved borrowing limit of ₹10,000 crore in FY26 and availed gross borrowings of ₹9,580.9 crore during the year. KIIFB has a similar borrowing plan for FY27, it said.
The Kerala State Planning Board said in March 2026 that including borrowings by entities such as KIIFB within Kerala’s borrowing limits had changed KIIFB’s role as an extra-budgetary resource mobilization instrument. KIIFB’s borrowings continue to be counted within Kerala’s overall net borrowing ceiling, pending the outcome of constitutional litigation.
In 2024, Keralam sued Centre for counting off-budget debt in its official borrowing figures, claiming the move infringes on the state’s financial autonomy under Article 293. The has referred the dispute to a five-judge constitution bench, which is yet to begin hearings/pronounce an order.
Maharashtra provides a more recent example of how borrowing through a state-owned entity can create an eventual budgetary obligation. The CAG report for FY25, tabled in July 2026, said that ₹18,440 crore was raised through off-budget borrowings by the Maharashtra State Road Development Corp. (MSRDC) during the year, taking its outstanding off-budget borrowings to ₹28,325 crore. The borrowings were raised from Hudco against state government guarantees, with repayment met through state budgetary provisions.
The FY25 audit report for Assam put its outstanding off-budget borrowing at ₹2,639.20 crore as of 31 March 2025, compared with ₹1,801.31 crore reported by the Department of Expenditure for Assam’s state public-sector enterprises and SPVs. However, an Assam government official, who refused to be named, confirmed the figures and said that ₹542.11 crore was raised during FY25 from Nabard.
Punjab was flagged as well. The CAG’s 2023-24 Finance Accounts reported ₹1,674.58 crore of off-budget borrowings, while its State Finances Audit Report put such borrowings at ₹2,138 crore at the end of FY24, with principal and interest serviced through the state budget and assignment of state revenue. For both, FY24 data is the latest available.
Bihar reported no off-budget borrowing to the Union finance ministry for 2024-25. CAG said the state provided ₹368.96 crore during the year as assistance or grants towards repayment of principal and interest on off-budget borrowings.
Real concern
According to a second official, the concern is not really about borrowing through state entities; some of them can be used to finance infrastructure and specific public programmes. The fiscal risk arises when the borrowing entity lacks sufficient independent revenues to service the debt, and the repayment obligation ultimately falls on the state budget.
“The key issue is to ensure that liabilities backed by the state are captured transparently, irrespective of which entity raises the funds,” the official added.
Queries emailed to the chief secretaries and finance secretaries of Kerala, Punjab, Assam, and Bihar, CAG, a finance ministry spokesperson and the expenditure secretary remained unanswered.
Experts say these practices raise concerns about fiscal transparency. “State borrowing through PSUs and SPVs raises fiscal transparency concerns because the borrowing may effectively finance government expenditure or state liabilities without appearing directly as debt on the state’s balance sheet,” said Madhavi Arora, chief economist, Emkay Global Financial Services.
“Off-budget borrowings can be necessary under many situations. However, transparently reporting the quantum of off-budget liabilities as a separate line item in the budget statement is important,” said Ranen Banerjee, partner and leader, economic advisory, PwC India. “This creates a transparent reporting of the total liabilities of a government and is also a good report for the policy makers to refer to, which can keep the tendencies of fiscal profligacy owing to populist pressures under check.”
Sustainable or not?
According to the Reserve Bank of India, states’ borrowing requirements remain elevated, with state governments raising ₹2.04 trillion through market borrowings in the first quarter of FY27, even as the central bank continues to flag concerns about state debt sustainability. The central bank had flagged the issue earlier in a December 2024 report, calling for enhanced disclosure of outstanding liabilities, off-budget borrowings and guarantees.
“The fiscal situation of states is becoming increasingly challenging, forcing them to borrow beyond their budgetary provisions, including through off-budget borrowings,” said Lakhwinder Singh, professor of economics, Thapar School of Liberal Arts and Sciences (TSLAS) and also visiting Professor, Institute for Human Development (IHD), New Delhi. “There are several reasons for this. One key factor is the declining share of central tax devolution to states, which has constrained their fiscal space. The growing mismatch between revenue availability and expenditure needs is pushing states towards additional borrowing to meet essential spending commitments.”
The central tax devolution to states in the last fiscal was estimated at ₹13.93 trillion.
“Borrowing through PSUs and SPVs is not inherently problematic; the concern arises when the economic liability ultimately rests with the state but remains outside its headline debt numbers. If repayment depends on budgetary support, guarantees or state transfers, such exposure needs to be transparently disclosed,” said Divakar Vijayasarathy, founder and CEO DVS Advisory Group.