Public Sector Debt in India: Analyzing the Sustainability of Borrowing Practices in PSUs

Public Sector Undertakings (PSUs) in India have historically played a pivotal role in driving industrialization, infrastructure development, and social welfare initiatives. However, their growing reliance on debt financing to bridge operational inefficiencies and fund capital expenditures has raised significant concerns about the sustainability of their borrowing practices. This paper critically examines the evolving debt landscape of central and state-level PSUs in India, exploring the fiscal risks, repayment capabilities, and macroeconomic implications of increasing public sector liabilities.The study integrates data from official sources such as the Reserve Bank of India (RBI), Comptroller and Auditor General (CAG), Ministry of Finance, PRS Legislative Research, and credit rating agencies to provide an empirical assessment of debt accumulation trends, debt-servicing burdens, and contingent liabilities arising from state guarantees. Through case studies of high-debt sectors such as power distribution (DISCOMs), telecom, and infrastructure, the paper highlights how policy-driven bailouts and deferred structural reforms have often led to moral hazard and recurring debt cycles.In particular, the analysis emphasizes how schemes like the Ujwal DISCOM Assurance Yojana (UDAY), although well-intentioned, failed to deliver long-term financial discipline due to weak implementation, continued political interference, and absence of market-linked accountability. The research further dissects key fiscal indicators—such as debt-to-GDP ratios, interest coverage, and debt service obligations—across various PSUs and states to evaluate their solvency and liquidity positions.The findings reveal that while the central government's debt trajectory has remained relatively stable, state-level PSU borrowing has surged, posing systemic risks to public finance. The study concludes with forward-looking recommendations for ensuring sustainable public sector borrowing, including enhanced transparency, fiscal rule compliance, operational restructuring, and a gradual shift towards market-based financing models. The paper thus contributes to the discourse on fiscal sustainability, governance reforms, and the future role of PSUs in India's development strategy.