Sikkim’s Securities Auction: Financing Growth or Fueling a Debt Trap?

CB CHETTRI

The recent auction of securities by the Government of Sikkim, conducted through the Reserve Bank of India, worth Rs. 500 crore, has caught the attention of the media and the civil society alike. Independent media outlets highlighted the potential risks this could pose to the state’s financial health. Opposition parties also raised concerns about the rising debt through social media posts. Yet, for a large part of the public, this issue remains distant, as many have only a limited understanding of government securities and how such borrowings work.

Before examining the implications, it is important to understand the basics. Governments borrow money through securities, promising investors interest at regular intervals and repayment of the principal at maturity. These securities, primarily meant for developmental activities, are referred to as State Development Loans (SDL). In the case of Sikkim, the government has not disclosed the specific projects that will be funded through this auction.

How are securities auctioned?

State securities are auctioned in two ways: price-based and yield-based. Sikkim has opted for a yield-based auction, where investors, typically large institutional players, quote the interest rate they are willing to accept. All the securities auctioned by the state government to date carry a maturity period of 10 years. So, the principal amount is repaid after 10 years, while interest is paid semi-annually.

Sikkim’s Borrowing Trend

Borrowing through securities is not a new phenomenon in Sikkim, but its intensity has increased sharply in recent years. Data from the Reserve Bank of India shows that the state has raised a total of Rs. 14,018.36 crore through auctions since 2006, with Rs. 9,846 crores raised in the past six and a half years alone. Interestingly, borrowings tend to surge in the year before elections.

Figure 1: Trend of borrowings through the auction of securities.

Source: Data compiled from the RBI website.

The highest one-time auction took place on October 4, 2024, for Rs. 1,000 crore, and the largest annual total was Rs. 1,966 crore in the same year. In just the first two quarters of the 2025-26 fiscal year, Sikkim has already auctioned securities worth Rs. 1,451 crore, suggesting that borrowing through the sale of securities is likely to continue rising.

Interest and Repayment Burden

Borrowing through securities comes with interest obligations. Assuming 7.5 per cent interest rate, Sikkim will have to pay significant sums annually. For example, interest alone on borrowings already raised will amount to Rs 10,489.79 crore over the years, as indicated in Table 1. As new auctions continue, the interest liabilities of the state will grow further.

Table 1: Interest payable annually by the state government.

Source: Data compiled from the RBI website.

Repayment of the principal adds to the state's burden. With a 10-year maturity period, the state will pay the principal in lump sum at the end of each period along with the accrued interest. On average, from 2026 to 2035, Sikkim will require approximately Rs 1,850 crore annually to service its existing debt. By 2035, even without fresh borrowings, total repayment could reach Rs 24,508.15 crore, which is almost double the size of its current annual budget.

Table 2: State’s annual repayment obligations.

Source: Data compiled from the RBI website.

A Broader Debt Picture

Borrowings of the state government are not limited to securities. The state also borrows from the Centre, financial institutions, provident funds, small savings, public accounts, and short-term RBI advances. As of March 2025, the total outstanding debt stands at approximately Rs 26,000 crore and is expected to continue growing.

While borrowing is not inherently bad, it becomes a concern when repayment capacity is limited. For a small state like Sikkim, which has limited internal revenue sources—especially after the 2023 GLOF halted hydropower projects and with potential reductions in central government grants due to GST rationalization—caution is essential.

Another concern is that the rate at which interest on the auctioned securities is increasing is now faster than the growth rate of the state’s GSDP. This indicates that Sikkim’s debt burden is compounding at a rate higher than its economic growth, meaning liabilities are rising faster than the state’s income. If this trend continues, Sikkim may face a situation where the cost of servicing its debt begins to outstrip its revenue-generating capacity—a classic sign of a potential debt trap.

Way Forward

The first step for Sikkim is to recognize that growing debt is a real challenge. The state must prioritise careful fiscal management, reduce non-essential spending, and find ways to boost revenue, particularly through tried-and-tested sectors such as tourism and agriculture.

However, both of these sectors are currently facing structural weaknesses. Tourism in Sikkim no longer has the unique appeal it once did. Earlier, the state was celebrated for being India’s first organic state—an identity that drew curious travellers, eco-tourists, and admirers of sustainable living. Today, that sense of distinctiveness has faded. Sikkim is increasingly seen as just another hill destination—comparable to Mussoorie, Meghalaya, or other Himalayan towns. Without a unique selling point or fresh branding, reviving tourism as a major revenue source will be a difficult task.

Agriculture, too, faces serious manpower challenges. With a large section of the working population absorbed in low-paying government jobs, there is limited workforce left to actively engage in farming. Consequently, productivity has stagnated, and agriculture has not evolved to the level where it can significantly influence internal revenue generation. To reverse this trend, Sikkim would need to invest in value-added agricultural chains, cooperative farming models, and technology-based interventions—but that will take both time and resources.

Given these realities, Sikkim must look beyond conventional options. Fiscal prudence, transparent disclosure of borrowing purposes, and effective debt management are crucial. The government needs to ensure that the money raised through securities is invested in productive sectors that can generate measurable returns—otherwise, debt will only accumulate without creating long-term assets.

Sikkim stands at a crossroads: with efficient management, securities auctions can finance progress; without caution, they could lead the state into a long-term financial strain.

(Views are personal)