The Debt Trap, Why Four Indian States Are Struggling to Pay Interest and What Can Be Done

The Debt Trap, Why Four Indian States Are Struggling to Pay Interest and What Can Be Done

Introduction: The Inheritance No Government Wants

When newly elected governments take office, they typically inherit a mix of assets and liabilities. But for the four states that recently went to the polls—Tamil Nadu, West Bengal, Kerala, and Assam—the inheritance is disproportionately weighted toward one crushing liability: debt. According to a detailed analysis by Harish Damodaran, these states face a mounting debt burden that threatens to crowd out development spending, constrain fiscal autonomy, and leave future generations with an unsustainable legacy.

Tamil Nadu’s outstanding debt has nearly quadrupled from ₹2.8 lakh crore in 2016–17 to a projected ₹10.6 lakh crore in 2026–27. Kerala and West Bengal have long struggled with debt-to-GDP ratios exceeding 30%. Even Assam, historically a special category state with preferential funding, has seen its debt-to-GDP ratio surge from 17.1% to 25.2% over the last decade.

Behind these staggering numbers lies a more immediate crisis: interest payments. Tamil Nadu will spend an estimated ₹78,677 crore servicing its debt in 2026–27—nearly 23% of its total revenue receipts. For West Bengal and Kerala, the figure hovers close to 20%. In plain language, these states are spending a fifth or more of their income just to pay interest, before a single rupee is spent on schools, hospitals, roads, or welfare.

This article unpacks the debt dynamics across the four states, explains why interest payments have ballooned, contrasts special and non-special category status, and explores both conventional and unorthodox solutions—including the provocative proposal to sell a state’s stake in a profitable company like Titan to retire debt.

Part 1: The Numbers That Should Keep State Finances Awake at Night

Tamil Nadu: Quadrupled Debt in a Decade

Between 2016–17 and 2026–27 (budget estimates), Tamil Nadu’s outstanding debt rose from ₹2.8 lakh crore to ₹10.6 lakh crore—a nearly fourfold increase. The debt-to-GDP ratio climbed from 21.8% to 26.1%. While this remains below the all-state average (29.2% in 2025–26), the trajectory is concerning.

More alarming is the interest payment burden. A decade ago, Tamil Nadu spent 15.3% of its total revenue receipts on interest. For 2026–27, that figure is budgeted at 22.8%. Interest payments themselves have ballooned from ₹21,449 crore to ₹78,677 crore.

Why does this matter? Because every rupee spent on interest is a rupee not spent on:

• A new classroom or a teacher’s salary.

• A hospital bed or a primary health centre.

• A road, a bridge, or a rural water supply.

• A farm subsidy or an industrial incentive.

When interest consumes nearly a quarter of revenue, the fiscal space for development shrinks dramatically.

West Bengal and Kerala: The High-Debt Club

Both West Bengal and Kerala entered the 2016–17 period with already high debt-to-GDP ratios—in the 30–38% range. Over the subsequent decade, West Bengal has roughly maintained those levels, while Kerala has seen its ratio increase further.

The interest payment-to-revenue receipts ratio for both states is close to 20% —meaning one-fifth of every rupee the government earns goes straight to creditors. For comparison, the all-state average for this ratio was 12.2% in 2025–26. Tamil Nadu, West Bengal, and Kerala are all significantly above that average.

Assam: The Special Category Exception

Assam’s story is different. Its debt-to-GDP ratio has increased from 17.1% to 25.2% over ten years—still a significant jump, but from a lower base. More importantly, Assam’s interest payments have remained well contained, at less than 10% of its revenue receipts.

The primary reason, as the analysis explains, is Assam’s status as a special category state. This entitles it to receive 90% of central funding for schemes and projects as interest-free grants, with only 10% as loans. For non-special category states (plain, non-hilly, non-Northeast states), the grants portion is just 30%, with 70% coming as interest-bearing loans.

This distinction is not academic. It directly affects the debt trajectory. A state that receives funds largely as grants does not accumulate debt for those projects. A state that must borrow for 70% of central scheme funding adds to its debt stock every year—and pays interest on that debt in perpetuity.

Part 2: The Interest Rate Squeeze – Why Timing Matters

Hardening Interest Rates

Even if the principal amount of debt remains unchanged, rising interest rates increase the burden. The analysis provides a concrete example: On May 5 of a recent year, Tamil Nadu borrowed ₹1,000 crore through a six-year state government security at an average interest rate of 7.49%. Just one year earlier, the same ₹1,000 crore loan for the same tenure was raised at only 6.54% .

This 0.95 percentage point increase translates into an additional ₹9.5 crore in interest every year for six years—₹57 crore extra over the life of the loan. For a state that raises thousands of crores annually, the cumulative effect is enormous.

More broadly, states are now paying 7.72–7.73% on 10-year borrowings, compared to 6.7–6.8% at the same time last year. Every percentage point increase in interest rates adds roughly ₹1,000 crore in annual interest for every ₹1 lakh crore of debt. For a state like Tamil Nadu with over ₹10 lakh crore in debt, a 1% rate hike adds over ₹10,000 crore to the annual interest bill.

The Unsustainability Threshold

When does debt become unsustainable? There is no single magic number, but two ratios are closely watched:

The analysis states bluntly: “The existing and rising levels of debt are simply unsustainable for these states.” Unsustainable does not mean default—Indian states have never defaulted. It means that the quality of governance deteriorates as more revenue goes to creditors and less to citizens.

Part 3: Conventional Solutions – Restructuring, Reforms, and Riders

Central Government Intervention

The Union government has the power to restructure its loans to states, waive or reduce interest, or even write off a portion of the principal. However, such relief typically carries riders—conditions that states must meet.

The analysis lists potential conditions:

These reforms are politically difficult. Electricity subsidies are popular. Universal welfare schemes (free rice, free electricity) win votes. User charges face protests. But without such reforms, the analysis implies, central bailouts may not come—or may come only with strings attached.

What About Tax Revenue Growth?

Not discussed in the analysis but worth noting: States can also grow their way out of debt by increasing their own tax revenues. State GST, stamp duty, motor vehicle tax, and state excise are major sources. However, tax growth requires economic growth, which debt-servicing costs can suppress. It is a vicious cycle.

Part 4: Unorthodox Solutions – The Titan Case Study

The TIDCO-Titan Holding: A Hidden Treasure

The analysis presents a genuinely novel proposal, using Tamil Nadu as an example. The state government, through the Tamil Nadu Industrial Development Corporation (TIDCO) , holds a 27.88% stake in Titan Company Ltd. —the lifestyle accessories giant behind Titan watches, Tanishq jewellery, Fastrack, CaratLane, and other brands.

To put this in perspective:

• The Tata Group, through its holding company and subsidiaries, holds a combined 25.02% stake in Titan.

• TIDCO’s 27.88% stake makes the Tamil Nadu government the single largest promoter of Titan.

Titan Company is highly profitable. In the year ended March 31, 2025, it earned a net profit after tax of ₹3,337 crore on a total income of ₹60,942 crore. TIDCO received ₹272 crore as dividend from its stake in 2024–25.

The Market Value of the Stake

Here is where the numbers become striking. Based on the closing traded price of Titan shares on May 6 (of the relevant year), the company’s total market capitalization was approximately ₹3.87 lakh crore. TIDCO’s 27.88% stake would therefore be valued at approximately ₹1,07,873 crore—more than ₹1 lakh crore.

“Simply put, if TIDCO were to sell its entire stake in Titan Company, the Tamil Nadu government would be able to mobilise upwards of Rs 1 lakh crore and bring down its outstanding debt by roughly a tenth.”

The Trade-Off: Dividends vs. Interest Savings

The analysis does a simple but powerful calculation. Currently, TIDCO earns ₹272 crore annually as dividends from Titan. If the state sold the stake and used the proceeds to repay debt, what would it save in interest?

Tamil Nadu pays an average interest rate of approximately 7.5% on its borrowings. On ₹1,07,873 crore of retired debt, the annual interest saving would be roughly:

₹1,07,873 crore × 7.5% = ₹8,090 crore

Compare ₹8,090 crore in interest savings to ₹272 crore in dividend income. The interest saving is nearly 30 times larger. Even accounting for foregone future growth in Titan’s dividends and share price, the arithmetic strongly favors selling.

Why Would a Government Consider Selling?

There are several arguments in favor:

1. Immediate fiscal relief: ₹1 lakh crore would reduce Tamil Nadu’s debt by 10% overnight.

2. Recurring interest savings: ₹8,000+ crore freed up every year for development.

3. No operational role: The state does not manage Titan; it is a passive investor. The company would continue unaffected under other promoters (Tata Group, public shareholders).

4. Better use of capital: A government’s core competence is not equity investment. The proceeds can be redeployed into infrastructure, health, education—where the state has direct responsibility.

Arguments Against Selling

There are also counterarguments:

1. Loss of a strategic asset: Titan is a well-managed, growing company. The stake may be worth much more in a decade.

2. Political symbolism: TIDCO’s role in Titan’s founding (1984 joint venture) is a point of pride. Selling could be framed as selling the family silver.

3. Dividend growth: Titan’s dividends may grow significantly over time, narrowing the gap with interest savings.

4. One-time vs. recurring: Selling gives a one-time lump sum but ends a perpetual income stream.

The analysis does not definitively advocate for sale; rather, it presents the option as an example of the kind of unorthodox thinking required.

Part 5: Applying the Model to Other States

Does Kerala Have a Titan?

The analysis notes that “finding new revenue sources to alleviate a chronic debt burden presents a similar challenge for the other states too.” While Kerala and West Bengal may not have a Titan-sized public sector gem, they do have:

• Kerala: Large holdings in public sector undertakings (PSUs) like Kerala State Industrial Development Corporation (KSIDC) stakes in companies; valuable land assets, including prime properties in the Gulf repatriation era; and stakes in cooperative sector institutions.

• West Bengal: Land assets (closed mills, industrial plots), stakes in PSUs, and potentially under-leveraged mineral resources.

• Assam: Tea gardens, land banks, and hydroelectric project stakes.

The principle is universal: governments often sit on valuable assets while simultaneously complaining about debt. A systematic asset monetization strategy—selling non-strategic stakes, leasing land, unlocking real estate value—could generate substantial one-time proceeds to retire debt.

The Disinvestment Precedent

India’s central government has pursued a disinvestment policy for decades, selling stakes in companies like Hindustan Zinc, Maruti Suzuki, and most recently, selling Air India and taking LIC public. States have been slower to follow, partly because PSUs provide patronage and partly because asset sales are politically sensitive. But as debt burdens mount, the political calculus may change.

Part 6: The Broader Fiscal Context – What the All-State Average Hides

States Are Not All Alike

The all-state average debt-to-GDP ratio of 29.2% (2025–26) hides enormous variation:

• Low-debt states: Odisha (fiscal discipline plus mineral revenues), Gujarat (high growth), Maharashtra (large economy).

• High-debt states: Punjab (over 40%), West Bengal, Kerala, Tamil Nadu (rising).

The interest-to-revenue ratio of 12.2% also hides variation. States with high ratios are essentially borrowing just to pay interest on past borrowing—a classic debt trap.

The Role of Off-Budget Borrowings

The analysis does not discuss off-budget borrowings—loans taken by state-owned corporations that are guaranteed by the state government. These do not appear in “outstanding debt” figures but represent contingent liabilities. In some states, these off-budget borrowings are substantial, making the true debt burden even higher.

Conclusion: The Hard Choices Ahead

The newly elected governments of Tamil Nadu, West Bengal, Kerala, and Assam have received a mandate for development, welfare, and renewal. But they have also inherited a fiscal reality that makes those promises difficult to fulfill. When 20–23% of every rupee of revenue goes to interest payments, the room for new spending is severely constrained.

There are no easy solutions. Raising taxes is politically unpopular. Cutting welfare spending breaks promises. Waiting for central bailouts is uncertain. Borrowing more to pay interest is not a solution—it is the problem.

This is why the analysis highlights unorthodox solutions like selling the Titan stake. Whether or not Tamil Nadu actually does so, the proposal forces a necessary conversation: What assets are states sitting on? What would it mean to convert those assets into fiscal space for development? And what political courage is required to do so before the debt becomes truly unsustainable?

For students of Indian political economy, the debt dynamics of these four states offer a case study in federal fiscal relations, the legacy of populism, and the hard trade-offs between short-term political survival and long-term fiscal health.

5 Questions & Answers (Q&A) for Examinations and Debates

Q1. What are the key debt indicators for Tamil Nadu, West Bengal, Kerala, and Assam, and how do they compare to the all-state average?

A1.

Key observations:

• Tamil Nadu’s debt quadrupled in a decade, and its interest-to-revenue ratio (22.8%) is nearly double the all-state average (12.2%).

• West Bengal and Kerala have persistently high debt-to-GDP ratios (30–38% range) and interest burdens (~20%).

• Assam, due to special category status (90% grants, 10% loans), maintains a low interest-to-revenue ratio despite rising debt-to-GDP.

The analysis concludes that the existing debt levels are unsustainable, particularly for non-special category states facing hardening interest rates.

Q2. What is the difference between “special category” and “non-special category” states, and how does it affect debt accumulation?

A2. Special category states are those with hilly terrain, difficult geography, or strategic border locations—primarily the Northeastern states (Assam, Nagaland, Manipur, etc.), Himachal Pradesh, Uttarakhand, and Jammu & Kashmir (formerly). They receive a 90% grants, 10% loan formula from the Centre for centrally sponsored schemes.

Non-special category states (plain, non-hilly states like Tamil Nadu, West Bengal, Kerala, Uttar Pradesh, Gujarat, etc.) receive a 30% grants, 70% loan formula.

Impact on debt:

• For a ₹100 crore project, a special category state receives ₹90 crore as an interest-free grant and must borrow only ₹10 crore.

• A non-special category state receives ₹30 crore as a grant and must borrow ₹70 crore—creating seven times more debt for the same project.

Over years, this difference compounds. Assam’s interest-to-revenue ratio remains below 10% partly because of this preferential treatment. Tamil Nadu and West Bengal, despite larger economies, face heavier interest burdens because they must borrow for a much larger share of central scheme funding. This structural disparity is a recurring theme in India’s fiscal federalism debates.

Q3. Explain the proposal to sell TIDCO’s stake in Titan Company. What are the potential benefits and drawbacks?

A3. The proposal: TIDCO (Tamil Nadu Industrial Development Corporation) holds a 27.88% stake in Titan Company Ltd., valued at approximately ₹1,07,873 crore (based on market price on May 6 of the relevant year). The state could sell this entire stake and use the proceeds to retire an equivalent amount of debt.

Potential Benefits:

• Immediate debt reduction: Retiring ₹1.07 lakh crore of debt would reduce Tamil Nadu’s total outstanding debt by roughly 10%.

• Massive interest savings: At an average interest rate of ~7.5%, the state would save approximately ₹8,090 crore annually in interest payments.

• Fiscal space for development: The ₹8,090 crore saved could fund schools, hospitals, roads, or targeted welfare—instead of going to creditors.

• Comparison with current dividend: TIDCO currently earns only ₹272 crore annually as dividends—the interest savings are nearly 30 times higher.

Potential Drawbacks:

• Loss of a strategic asset: Titan is a well-managed, growing company. The stake could be worth significantly more in a decade.

• Foregone dividend growth: Titan’s dividends may increase over time, narrowing the gap with interest savings.

• Political symbolism: The state’s role in founding Titan (1984 joint venture) is a point of pride; selling could be framed as selling the family silver.

• One-time vs. perpetual: Sale provides a one-time lump sum but ends a perpetual income stream (dividends).

The analysis does not definitively advocate for sale but presents it as an example of the unorthodox thinking required to address chronic debt burdens.

Q4. How do hardening interest rates affect state debt sustainability? Provide a numerical example.

A4. Hardening interest rates refer to an increase in the cost of borrowing—i.e., the interest rate at which states can raise loans through auction of state government securities.

Numerical example from the analysis:
Tamil Nadu borrowed ₹1,000 crore via a six-year state government security:

• One year ago: Interest rate = 6.54%

• Recently: Interest rate = 7.49%

Difference: +0.95 percentage points.

Impact:

• Annual interest before: ₹1,000 crore × 6.54% = ₹65.4 crore

• Annual interest after: ₹1,000 crore × 7.49% = ₹74.9 crore

• Additional annual interest: ₹9.5 crore

• Over six-year tenure: ₹9.5 crore × 6 = ₹57 crore extra

Scaling up:

• On 10-year borrowings, states are now paying ~7.72–7.73% vs. ~6.7–6.8% last year (~1 percentage point increase).

• For a state with ₹10 lakh crore debt, a 1% rate hike adds ₹10,000 crore to the annual interest bill.

Why this matters: Even if a state stops taking new loans, rising interest rates increase the cost of rolling over existing debt (refinancing at higher rates). This is particularly dangerous for states with high debt-to-GDP and high interest-to-revenue ratios, as every rate hike directly reduces fiscal space for development.

Q5. What reform conditions might the Centre attach to debt relief for states, and why are these politically difficult?

A5. According to the analysis, the Union government can restructure, waive, or reduce interest on loans to states—but relief typically carries riders (conditions) . Potential conditions include:

Why politically difficult: These reforms impose visible costs on specific groups (higher electricity bills, water charges, loss of universal benefits) while the benefits (reduced debt, more fiscal space for development) are diffuse and long-term. Politicians face immediate backlash for reforms but receive delayed credit. This is the classic collective action problem of fiscal consolidation.

Without such reforms, the analysis implies, central bailouts may not come—or may come only with conditions that states find unpalatable. The alternative—continuing on the current debt trajectory—is also unpalatable, as rising interest payments crowd out development spending, potentially leading to a fiscal crisis.