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Informist, Sunday, Feb. 1, 2026

 

--Fin Panel: Moot states use switches, buybacks to smoothen redemptions 
--Fin Panel: See states' debt-to-GDP 27.2% by FY31 if 3% fisc gap adhered to 
--Fin Panel: Recommend states fiscal deficit be capped at 3% of GSDP 
--Fin Panel: Recommend states completely discontinue off-budget borrowing

--Fin Panel: Didn't recommend revenue deficit grants to states 

 

NEW DELHI – The 16th Finance Commission recommended that states should maintain a borrowing limit of 3% of their gross state development product per year during 2026-27 (Apr-Mar) to FY31, the same limit as that in FY26. This would bring down their outstanding debt-to-GSDP ratio to 27.2% by March 2031, provided they adhere to the borrowing limits, the panel said in its report. 
 

The commission also recommended states should actively explore strategies such as bond switches and buybacks adopted by the Centre to smoothen their redemption profile in specific years. While states don't have specific roll-over risk coming up, the redemption profile in specific years has been higher due to the spike in their borrowing during the COVID-19 pandemic, the report said.

 

A switch operation entails replacing a security maturing in the near term with a longer-maturity paper, which delays the repayment of the debt. The Centre has targetted gilt switches worth a record INR 2.50 trillion for FY27, according to the Union Budget presented by Finance Minister Nirmala Sitharaman in the Lok Sabha Sunday. She laid the finance commission's report, presented to the President in November, in Parliament before the presenting the Budget. The Centre had conducted gilt switches and buybacks worth over INR 2.5 trillion in FY26 to bring down its redemptions in the coming years.

 

Informist had reported in December the panel had likely recommended to state governments ways in which they can reduce their debt to align their fiscal management with the Centre's debt-to-GDP ratio targeting. The report said states should also issue bonds in benchmark, heavily-traded securities like the Centre does. Further, they should re-issue more securities to improve secondary market liquidity in bonds, which are seldom traded compared with central government bonds. The Finance Commission also recommended that states should not get revenue deficit grants or any sector-specific or state-specific grants.

 

"The Commission has observed that State finances in general, and that of tax revenues, committed expenditure and discretionary expenditures in particular shows that there is significant scope of increasing revenues and rationalising expenditure," the report said. 

 

The Finance Commission also proposed that states completely discontinue off-Budget borrowings as these are a significant risk to fiscal stability. The Centre had mandated states would account off-Budget borrowings as part of their borrowing ceilings. This has brought down the use of off-Budget borrowings to 12 states from 18 states in FY25, with off-Budget borrowings accounting for only 0.1% of states' gross state development product, down from 0.3% two years earlier.  End

 

Reported by Aaryan Khanna

Edited by Tanima Banerjee

 

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