By Dr. Darishisha War Thangkhiew
Meghalaya, like other northeastern states except Assam, is classified as a ‘small’ state—small not only in geography but also in economic size, measured by Gross State Domestic Product (GSDP). While GSDP has risen substantially in recent years, so have public debt and liabilities. This trend reflects government policies aimed at spurring development, but it has triggered concerns over fiscal sustainability.
Common indicators of fiscal sustainability include the growth-interest differential (GID), debt-to-GSDP ratio, outstanding liabilities-to-GSDP ratio, interest payments-to-revenue receipts (RR) ratio, and interest payments-to-revenue expenditure (RE) ratio. We will attempt to evaluate Meghalaya’s debt sustainability using these indicators.
For Meghalaya, nominal GSDP growth in 2023–24 was 13.98%, exceeding the nominal interest rate of 7.01%. In real terms, GSDP grew at 5.80% against a real interest rate of 2.94%, yielding a positive differential of 2.85 percentage points. This suggests the economy is currently growing fast enough to cover interest costs, indicating debt sustainability. However, this buffer could erode if market borrowings rise and own revenue does not improve.
State government debt stood at 33% of GSDP in 2023–24, while outstanding liabilities reached 40.56% of GSDP. The Meghalaya Fiscal Responsibility and Budget Management (MFRBM) Act, 2006 mandates a debt-to-GSDP ceiling of 28%. The current level therefore exceeds the statutory limit, signaling excessive borrowing. Alarmingly, the 2023–24 budget earmarked ₹343.42 crore for debt repayment, but actual payments reached ₹4,140.36 crore. Such deviations raise transparency concerns. The CAG has also flagged growing off-budget expenditure—spending not approved by the State Legislature—indicating weak fiscal governance. Despite high borrowing, development outcomes remain poor. Meghalaya’s unemployment rate was 6% in 2022–23, and the state ranked fourth from the bottom in NITI Aayog’s SDG India Index 2023–24. High borrowing has not translated into commensurate development gains.
Meghalaya spent 6.3% of revenue receipts on interest payments in 2023–24, the lowest share since 2019–20. The interest payment-to-revenue expenditure ratio has also declined over five years. Based on these metrics, the debt burden appears manageable for now.
The GID and interest ratios suggest debt is currently sustainable. However, the liabilities-to-GSDP ratio breaches MFRBM limits, indicating excessive leverage relative to the economy’s size. The critical question is whether future growth can outpace debt servicing obligations, and whether borrowing is financing productive, gainful activities.
In recent months, concerns have emerged that Meghalaya may be falling into a ‘debt trap’, causing understandable public anxiety. Yet the Niti Aayog, recently published the Fiscal Health Index (FHI), 2026, for all the states in India, showing Meghalaya occupying the fourth rank among the 10 Himalayan and northeastern states. A debt trap occurs when a government borrows primarily to service existing debt rather than for productive expenditure. One test is the share of borrowings allocated to capital expenditure. According to the CAG State Finances Audit Report 2023–24, 60% of Meghalaya’s borrowings were used for capital outlay on long-term infrastructure. This shows a substantial portion remains productive and is not entirely diverted to debt servicing. By this metric, the state is not in a debt trap currently. However, the use of the remaining 40% requires scrutiny. If it finances interest payments, principal repayment, or revenue deficits, it signals emerging fiscal stress. Data show that in 2023–24, internal debt servicing of ₹1,578.82 crore—comprising ₹638.69 crore principal and ₹940.13 crore interest—exceeded fresh internal debt raised of ₹1,564 crore by 0.95%. The debt situation is also captured in the debt index of the FHI, showing the increasing share of interest repayment in the revenue generated. This means repayments outpaced new internal debt, challenging claims that debt remains manageable.
Meghalaya exhibits high fiscal dependence on the Union government, another aspect that should be brought to the forefront. In 2023–24, Grants-in-Aid and share in Central taxes formed 79% of total revenue receipts, amounting to ₹14,238 crore or 26.83% of GSDP. Grants-in-Aid alone were 10.5% of GSDP. The state also relies on Central loans. Outstanding loans from the Union rose from ₹2,002.58 crore in 2022–23 to ₹3,339.19 crore in 2023–24, a 66.7% increase. Externally Aided Projects (EAPs) from the World Bank and ADB add to liabilities. ADB approved a $79.5 million loan in November 2023 for ecotourism and natural farming. Institutional borrowings grew from ₹1,349.04 crore in 2022–23 to ₹1,799.16 crore in 2023–24, up 33.4%. This structural dependence constrains fiscal autonomy and exposes Meghalaya to policy shifts at the Central or multilateral level.
The Meghalaya Fiscal Responsibility and Budget Management (MFRBM) Act, 2006 mandates fiscal targets via the Medium-Term Fiscal Policy Statement. From 2019–20 to 2023–24, compliance was poor: the Revenue Deficit target was met in only two years, the Fiscal Deficit target in one year, and the outstanding liabilities-to-GSDP target in one year. Persistent non-compliance undermines the Act’s credibility and risks higher borrowing costs, reduced fiscal space for capital spending, and vulnerability to shocks.
High public debt typically forces fiscal austerity, crowding out social sector expenditure as interest payments rise. In Meghalaya, absolute allocations to education and healthcare have increased, but their relative shares have fallen. Education dropped from 18% of total expenditure in 2019–20 to 14% in 2023–24; healthcare fell from 8% to 7.7%. This occurred despite higher total expenditure-to-GSDP and capital expenditure-to-GSDP ratios, indicating deprioritization of social sectors. The impact is visible in outcomes: Meghalaya’s low SDG ranking. Continued debt accumulation risks further cuts to social spending.
The state’s ‘Mission 10’ aims for a USD 10 billion economy by 2028. This assumes current borrowing will drive desired growth. The target is overly optimistic and may create pressure to borrow unsustainably, raising debt trap risks. Policy should instead focus on identifying real growth drivers and prioritize inclusive, balanced development over headline growth numbers. A longer timeline for sustainable growth is preferable to debt-fueled expansion.
Fiscal autonomy depends on own resource generation. Meghalaya’s own tax revenue was only 7.05% of GSDP in 2023–24, covering just 17.68% of capital expenditure. This is low by national standards and needs urgent improvement through tax and non-tax base expansion, better administration, and reduced leakages.
Budgeting has been repeatedly flagged as inefficient. Large surrenders and savings reflect poor estimation and planning, locking resources that could fund overspent schemes. The government has also launched new schemes outside the budget without legislative approval, financing some via re-appropriation in violation of the State Budget Manual. Off-budget liabilities worsen fiscal stress and increase borrowing needs.
Meghalaya’s debt situation presents a mixed picture. Positive GID and low interest ratios suggest current manageability. However, breaches of MFRBM limits, high dependence on Central funds, rising debt servicing that exceeds fresh internal debt, declining social sector shares, and weak budget transparency point to mounting stress. The state is not in a full debt trap yet, but fiscal vulnerabilities are evident.
To ensure long-term sustainability, Meghalaya must adopt a multi-pronged strategy: replace non-concessional borrowing with concessional loans and grants while pursuing debt restructuring; enforce strict MFRBM compliance by curbing off-budget spending and requiring legislative approval for new schemes; undertake revenue reforms to expand the tax and non-tax base and improve collection efficiency; and implement institutional reforms to strengthen macroeconomic management, reduce resource waste, and shift from short-term targets to long-term inclusive development. Without a balanced approach integrating short-, medium-, and long-term goals, growth may occur but poverty, inequality, and unemployment will persist.
(The author is an Assistant Professor, Department of Economics, NEHU)
