Debt Dynamics

The COVID-19 pandemic exposed the fragility of state finances, with debt-to-GDP ratios skyrocketing from 25.3% in 2019 to 31% in 2021. Recent trends, however, signal cautious optimism. The Reserve Bank of India’s 2024 report reveals that the collective debt-to-GDP ratio of Indian states has dipped to 28.5%, reflecting a turn towards fiscal prudence. Yet, regional disparities remain stark, with states like Odisha and Gujarat boasting ratios as low as 16.3% and 17.9%, while Punjab’s debt-to-GSDP ratio stands at an alarming 46.6%.

NITI Aayog’s recently introduced Fiscal Health Index provides a comprehensive framework to assess the fiscal health of states across parameters like fiscal prudence, debt sustainability, revenue mobilization, and quality of spending. It highlights best practices from top performers such as Odisha and Gujarat while identifying chronic fiscal challenges in Punjab, Andhra Pradesh, and West Bengal. For states like Sikkim, this presents a crucial opportunity to introspect and course-correct.

Sikkim, heavily reliant on tourism and hydropower, faces unique fiscal challenges. While its contribution to India’s overall debt burden may be small, Sikkim’s fiscal prudence remains critical to its economic future. As hydropower projects—a key revenue source—face growing criticism for environmental degradation and displacement, Sikkim must diversify its revenue streams. The Fiscal Health Index offers a template for improvement by focusing on revenue mobilization and efficient spending.

Sikkim must also exercise caution against the rising trend of "freebies," which, though politically expedient, strain state finances in the long run. Social welfare schemes should be recalibrated to focus on empowerment, such as skill development, education, and infrastructure. Additionally, with the state’s mountainous terrain posing logistical challenges, Sikkim must prioritize investments in road connectivity and digital infrastructure to enhance revenue-generating capacities.

Targeted reforms in power distribution are equally vital. Many states suffer from loss-making power distribution companies, and Sikkim is no exception. Strengthening this sector will not only ensure better fiscal health but also attract investments, particularly in clean energy solutions.

The NITI Aayog report rightly underscores the need for time-bound debt reduction strategies. For Sikkim, adopting a fiscal roadmap with clear milestones is imperative. Leveraging the lessons from fiscally sound states, Sikkim should focus on sustainable development, reducing reliance on external borrowings, and prioritizing sectors with high growth potential, such as organic farming, eco-tourism, and small-scale industries.

Fiscal discipline is not merely an economic necessity but a prerequisite for long-term stability. Sikkim, like other indebted states, must seize this moment to ensure its finances are resilient, sustainable, and aligned with the aspirations of its people.