Government Debt Is Not Household Debt — And State Debt Panic Misses the Point

Recent commentary on rising State government debt — including remarks by in an interview to — reflects a persistent misunderstanding of public finance in a modern monetary economy.

The framing treats government debt as if it were household or corporate debt: something that must be “paid back”, that risks insolvency, and that burdens future generations. This view may sound intuitive, but it is analytically wrong — and dangerously so when applied to States like .

Let us unpack this carefully.

1. Government debt is not like household debt

Households and firms are users of the currency. Governments — at least the Union government — are issuers of the currency.

When the Union government issues currency or treasury securities, it is not “borrowing” in the conventional sense. Both currency and government bonds are IOUs of the same issuer. The difference is simple:

  • Currency pays zero interest
  • Treasury securities pay interest

Government debt, therefore, is best understood as an interest-bearing alternative to currency, not as a liability that constrains spending.

This distinction became decisive after the collapse of the gold standard in 1971. Under gold convertibility, government debt could indeed become a solvency issue. In today’s non-convertible, fiat monetary system, it cannot.

The Union government cannot “run out of rupees”.

2. Why State governments are different — and why that matters

Indian States are currency users, not issuers. They do not control:

  • the currency
  • the reserve accounts
  • the interest rate
  • the clearing system

This is why State governments borrow — not because of profligacy, but because of constitutional design.

However, here is the critical point that is almost always missed:

State debt is a design consequence of vertical fiscal imbalance, not fiscal irresponsibility.

States like Tamil Nadu contribute far more to the Union’s tax pool than they receive back. In effect:

  • Currency is drained from the State economy via central taxes
  • Expenditure authority remains with the State
  • Borrowing fills the gap created by this asymmetry

Blaming States for debt without addressing this structural drain is intellectually shallow.

3. The real question is not “How big is the debt?” but “Can it be serviced?”

For a State government, the meaningful questions are:

  • Is the economy growing?
  • Are revenues stable and buoyant?
  • Is interest servicing consuming an unsustainable share of expenditure?
  • Is public spending generating real capacity — infrastructure, skills, health, productivity?

On all these counts, Tamil Nadu performs better than most Indian States.

Debt sustainability is about real resource capacity, not arbitrary debt-to-GSDP ratios. Fixating on ratios without context is a classic accounting error.

4. The Union government already has the solution — if it chooses to use it

The Union government has unlimited monetary capacity in rupees. It already:

  • backstops the banking system
  • absorbs government securities as needed
  • sets the interest rate
  • clears all rupee payments

Given this reality, there is a straightforward and logical policy option:

The Union government can retire State government debt — especially of net-contributing States — without any financial constraint.

This would:

  • lower State interest burdens
  • free fiscal space for development
  • correct vertical imbalance
  • strengthen cooperative federalism

The objection to this is political, not economic.

5. The irony in attacking Tamil Nadu

Tamil Nadu sends one of the largest contingents of MPs to Parliament and is a major net contributor to the national exchequer. To single it out for “debt criticism” — while ignoring the structural extraction of its fiscal surplus — is not just poor economics, it is poor federal ethics.

If one truly cares about India’s macroeconomic stability, the demand should be:

  • not that States “tighten belts”
  • but that the Union recognises its monetary sovereignty and federal responsibility

6. Debt panic is a distraction from real development questions

The obsession with government debt diverts attention from the real issues:

  • employment
  • industrial capacity
  • infrastructure quality
  • regional inequality
  • productive public investment

Countries do not stagnate because governments issue too many IOUs. They stagnate when governments fail to use their fiscal capacity to mobilise real resources.

Conclusion

Government debt is not a moral failing. It is a policy instrument.

State government debt in India is not evidence of recklessness — it is evidence of a federal design flaw. Criticising States without acknowledging this is not serious economics.

The choice before us is simple:

  • continue importing obsolete gold-standard thinking
  • or design fiscal federalism that matches the realities of a sovereign monetary system

Tamil Nadu’s issue is not debt.
It is that it contributes too much — and is allowed too little sovereignty in return.

Rajendra Rasu, 

The author writes on monetary systems and political economy.