'Unfortunately, states are not helping': Gita Gopinath praises Centre for fiscal discipline

Gita Gopinath, former Deputy Managing Director of the International Monetary Fund, on Wednesday praised the Union government for making significant strides in fiscal management but said state governments are lagging in maintaining fiscal discipline. 

She said India is gaining credibility on the global stage due to the Union government's efforts to stick to fiscal targets. However, she pointed out that excessive borrowing and weak fiscal planning at the state level are undermining the country’s overall fiscal credibility.

"The Union government is doing a very good job in terms of building credibility on the fiscal front, sticking to their spending targets, making sure the deficits are within what's been projected. So, India is gaining in terms of credibility because of what's being done at the Union level," Gopinath said while speaking at the Times Network's India Economic Conclave 2025.

"Unfortunately, the state governments aren't helping with India's credibility. There are many state governments where you have excessive borrowing, and that's going on. They're not able to maintain their projected path of spending and revenue. So there is this issue."

Gopinath suggested that one solution would be to incentivise states that demonstrate fiscal prudence. "You incentivise them in terms of how much resources they will get from the Union based on your performance," the economist said, adding that there is currently not enough incentive for states to maintain sound fiscal policies.

Finance Minister Nirmala Sitharaman has also raised concerns over states' fiscal management. Speaking at the conclave on Wednesday, she said the Centre had brought down India's debt-to-GDP ratio post-Covid and that state governments should follow a similar approach. She said RBI documents and various studies have shown that the debt-to-GDP ratio of states has reached a "worrisome" level.

"I'm not naming them here nor did I name them in the Parliament. Unless the debt-to-GDP, GSDP there, is managed well and is kept within their FRBM limits and the stock of debt--which has been accumulating over the years at high rates of interest that many states are unable to service--is brought down to an acceptable level, you will be borrowing to service the loans," the finance minister warned.

"You're not borrowing to take care of developmental expenditure. That's a poor play in the fiscal terrain. These have to be changed or else the momentum that India has acquired in the last 10 years...so that we can achieve the goal that we've set for ourselves-a developed India by 2047-is going to be very difficult to achieve."

In October this year, the RBI cautioned states against populist spending and fiscal slippage, especially in Bihar and Maharashtra. At a meeting with state finance secretaries in September, RBI governor Sanjay Malhotra urged states to keep borrowing in check and adhere to fiscal deficit targets under the Fiscal Responsibility and Budget Management (FRBM) framework, sources told Mint.

"Governor emphasised on the importance of fiscal discipline for promoting economic growth and prosperity," the RBI statement on the 35th Conference of State Finance Secretaries had said on 18 September.