While the Centre says it imposed the borrowing limits to curb fiscal indiscipline, states argue that this would restrict their legitimate borrowing space and hurt their financial plans. The borrowing ceiling for states is 3% of the gross state domestic product (GSDP). An additional borrowing of 0.5% of the GSDP is allowed if the states undertake certain reforms.
However, states say the Centre has put many additional conditions this year, curtailing their borrowing headroom. These include counting loans backed by state guarantees towards the borrowing limit.
“The Centre is treating loans outside the state exchequer as public debts and deducting these from the borrowing limit,” Kerala finance minister KN Balagopal told ET. “Because of these restrictions, Kerala will be able to borrow much less than the requirement and what is fairly due to the state this year,” he said. “We have flagged this to the union finance minister,” Balagopal added.
Kerala’s borrowing limit for the first nine months of 2025-26 is set at ₹29,529 crore. Last fiscal year, the Centre deducted ₹1,877.57 crore from the state’s borrowing ceiling. This was made as an adjustment for additional borrowing that was permitted during 2023-24.Union finance ministry officials, meanwhile, blame the state’s inability to stick to fiscal guidelines on off-budget borrowing issued by the Centre from time to time for the imposition of the additional conditions.As a part of its fiscal reforms, the finance ministry introduced a new rule to curb off-budget borrowings in the fiscal year 2021-22, where it said borrowings by state-owned entities, where principal and/or interest is serviced through state budgets and/or assignment of taxes/cess or any other state revenue, are factored in for the purpose of issuance of borrowing consent to state governments.
This year, this condition was extended to guarantees given by state governments to public sector enterprises or entities they control. Also from this year, unpaid power bills and shortfalls in the guarantee redemption fund were also added.
“The rules are the same for all states and guidelines were sent to them well in advance,” a senior central government official said.
According to the data by the finance ministry, Kerala’s off-budget borrowing in 2024-25 was ₹983 crore, which will be taken into account for this year’s borrowing ceiling.
Apart from that, the Centre also deducted ₹3,323 crore from Kerala’s borrowing limit for the first three quarters of 2025-26 due to a new condition on its non-contribution towards the guarantee redemption fund. The fund was established to meet potential future liabilities from guarantees issued by the central or state governments.
Kerala is not alone to face this.
The Centre reduced the borrowing limit of Punjab by ₹16,676 crore against the state government’s requested limit of ₹47,076.40 crore. For the first nine months, the Centre approved borrowing of ₹21,905 crore against the request for ₹35,307 crore. “The limit was cut on account of pending dues to discoms, unpaid power subsidy and arrears, which totalled above ₹15,000 crore,” the central government official said.
States can avail themselves of an additional 0.5% limit if they undertake additional reforms, the official said. For the Telangana government, the borrowings was reduced to ₹54,009 crore, against the state’s budget estimate of ₹64,539 crore for 2025-26. “We have extended a request to the Centre to allow additional borrowing,” an official from Telangana said, adding that the state has already borrowed ₹46,000 crore as of September 30 this fiscal year.
The Centre has been extending all help to reduce the debt burden of Telangana, central government officials said. It is considering a proposal to restructure states’ debt as well.
Maharashtra has the highest off the budget borrowing of ₹13,990 crore, and the state government already issued a directive last month that foreign aid must be accepted only with the Centre’s approval, as this would be part of the borrowing ceiling of the state.
Karnataka has off-budget borrowings of ₹5,438 crore.