Dr. Bhabesh Hazarika
(Economist, National Institute of Public Finance and Policy, New Delhi. He can be reached at hazbhabesh@gmail.com)
In this newspaper before the Budget presentation by the Finance Minister of Assam, Jayanta Mallabaruah, I argued that fiscal health of the state should not be judged solely by the size of its public debt. Debt is an important indicator, but it is not the most meaningful one. The more relevant questions are whether borrowing remains sustainable, whether it finances productive investment rather than current consumption, and whether the state's own revenues are growing fast enough to support future development. The 2026-27 Budget and the accompanying Medium-Term Fiscal Plan (MTFP) provide an opportunity to test these questions against the government's own fiscal projections. They present a picture that is more nuanced than either the optimism surrounding declining debt levels or the concerns expressed over rising borrowings.
Judged by conventional fiscal indicators, Assam's public finances appear to be on a stable trajectory. The MTFP projects the fiscal deficit to decline from 3.0 per cent of GSDP in 2026-27 to 2.49 per cent by 2031-32, while the debt-to-GSDP ratio is expected to fall from about 24 per cent to below 19 per cent over the same period. The Budget also envisages a balanced revenue account in 2026-27, followed by modest revenue surpluses. If these projections materialise, routine government expenditure would increasingly be financed from current revenues, allowing borrowing to be used primarily for capital investment, a principle that underpins prudent fiscal management.
These projections deserve recognition, but they should also be interpreted carefully. The projected improvement in the debt ratio reflects not only fiscal discipline but also the assumptions built into the medium-term framework. Nominal GSDP is assumed to grow by 15 per cent annually, while the outstanding debt stock is projected to grow by 10 per cent. Under such assumptions, the debt burden naturally declines relative to the size of the economy. Whether this trajectory is realised will depend as much on sustaining robust economic growth as on maintaining fiscal discipline.
One projection, however, deserves closer attention. Outstanding government guarantees are expected to increase sharply from about Rs 312 crore to Rs 2,103 crore in 2026-27 before remaining broadly stable thereafter. Guarantees are not public debt unless they are invoked, but they are contingent liabilities that can eventually become fiscal obligations. Their projected increase does not imply immediate fiscal stress, yet it is a reminder that assessing fiscal sustainability requires looking beyond the stock of debt alone.
The more interesting story, however, lies on the revenue side. While the MTFP assumes that Assam's economy will grow by 15 per cent annually, the projected growth rates for most major state taxes are noticeably lower. SGST, the state's largest own tax source, is expected to grow by 11 per cent, Sales Tax by 9 per cent, State Excise by 10 per cent, Stamp Duty and Registration by 10 per cent, and Motor Vehicle Tax by 10 per cent. The government's own assumptions therefore imply that tax revenues will expand more slowly than the economy itself.
This pattern is reflected in the medium-term fiscal indicators. Own Revenue is projected to decline from 5.50 per cent of GSDP in 2024-25 to 4.87 per cent in 2026-27, before falling further to 3.94 per cent by 2031-32. Similarly, Own Tax Revenue is projected to decline from 4.67 per cent to 3.35 per cent of GSDP over the same period. Together these trends describe a state economy that is expanding faster than the government's own capacity to tax it.
These projections imply a tax buoyancy of less than one, meaning tax collections are expected to grow more slowly than the economy that generates them. That is not necessarily a cause for alarm, but it does raise an important policy question. Has the government adopted deliberately conservative assumptions to avoid optimistic budgeting, or do these projections reflect deeper constraints in tax administration and compliance? The Budget documents do not provide a clear explanation. The distinction matters because stronger-than-expected revenue collections would create additional fiscal space, while structurally weak revenue growth would point to the need for sustained reforms in tax administration and compliance.
For a rapidly growing state, economic expansion should gradually translate into stronger own revenues. If the ratio of own revenue to GSDP continues to decline, the state's fiscal capacity will not expand in proportion to its economy. That would increase reliance on central transfers and constrain the government's ability to finance new priorities from its own resources. The next phase of Assam's fiscal reforms should place as much emphasis on strengthening revenue mobilisation as on maintaining fiscal discipline.
The revenue projections also have important implications for fiscal space. A declining debt ratio does not automatically translate into greater fiscal flexibility, since flexibility depends on what remains after committed obligations are met. Salaries, pensions and interest payments fall into this category, and these expenditures cannot easily be compressed in the short run. As they grow, they leave a shrinking residue of revenue for everything else the government might want to do.
The MTFP projects interest payments to increase from Rs 12,347 crore in 2026-27 to Rs 21,760 crore by 2031-32, with their share in revenue receipts rising from 10.41 per cent to 11.29 per cent. During the same period, salaries and pensions together are projected to increase from about Rs 62,700 crore to over Rs 1.07 lakh crore. The medium-term assumptions also indicate that interest payments and salaries will grow at 12 per cent annually, compared with around 10 per cent growth in revenue receipts, so this squeeze is built into the government's own plan rather than a risk sitting outside it.
These projections do not point to an immediate threat to fiscal sustainability. They do, however, suggest that fiscal flexibility is likely to become progressively tighter over the medium term. As committed expenditure absorbs an increasing share of revenue receipts, the government's discretionary spending space will inevitably narrow unless revenue mobilisation keeps pace. This could constrain the state's ability to expand development expenditure and sustain investments in critical sectors such as health, education, nutrition and social protection without either reprioritising expenditure or increasing borrowing.
This makes it even more important to safeguard capital expenditure. Unlike salaries, pensions and interest payments, capital investment is often the first casualty when revenues come under pressure. Yet it is precisely this expenditure that creates long-term economic returns by expanding productive capacity, improving connectivity and supporting private investment.
The Budget broadly preserves this commitment. Capital outlay is budgeted at around Rs 29,451 crore in 2026-27 and is projected to grow steadily over the medium term. Maintaining public investment despite rising committed expenditure is a sensible fiscal choice, and one that is not guaranteed to hold if revenue pressures intensify in later years.
At the same time, protecting the size of capital expenditure is only part of the challenge. Equal attention must be paid to its quality. Every rupee borrowed should finance projects that raise productivity, reduce logistics costs, strengthen irrigation, improve urban infrastructure, enhance energy reliability and build human capital. Such investments expand the state's productive capacity, attract private investment and eventually strengthen the tax base, whereas projects with weak economic justification or persistent implementation delays add to debt without generating comparable returns.
Part of Assam's recent increase in capital expenditure has been supported through the Union Government's Scheme for Special Assistance to States for Capital Investment, which makes this distinction more important, not less. As the design and availability of such support evolve, sustaining public investment will increasingly depend on the state's own fiscal capacity. Stronger revenue mobilisation and high-quality capital investment are therefore complementary objectives rather than competing ones.
Assam's fiscal debate has, for several years, been dominated by a single question: is the state's debt too high? The government's own medium-term projections suggest that this may no longer be the most useful question to ask. The projected decline in the debt ratio, the commitment to maintaining a balanced revenue account and the continued emphasis on capital expenditure indicate that the state's public finances are on a more stable footing than the public debate often acknowledges.
The more relevant challenge now lies elsewhere: whether Assam can build a revenue system that keeps pace with its economic growth, and whether it can preserve enough fiscal space to respond to future shocks while continuing to invest in productive assets. The answer will determine whether today's borrowing is converted into tomorrow's higher productivity and stronger revenues, or whether the recent improvement in fiscal indicators turns out to be a temporary phase of comfort rather than a durable shift.