The notion that a Government needs to cut back its spending as a policy response is called household fallacy
It is evident that in the post-FRBM era, there has been a decline in rate of growth of public debt.
Twelve states in India like UP, Andhra Pradesh, Punjab, Rajasthan, Himachal Pradesh, West Bengal, among others , are having higher debt-GDP ratio than Kerala.

There is a growing consensus that the emerging fiscal federal relations in India tend to constrain the States more than ever before. With the enactment of Fiscal Responsibility and Budget Management (FRBM) Act in 2003, the State Governments are under severe restrictions on deficit financing. The limits are also set for the freedom of the democratically elected State Government in setting their developmental agenda.  The implementation of GST resulted in state governments foregoing their maneuverability and autonomy in taxation, which is the major source of their revenue.  As elaborated in the issues of Kerala Economy, with the pandemic there has been a severe decline in the GST collection of all the States. As a result, the resource constrained State Governments are left with hardly any option other than borrowing for financing development.
Borrowing-induced debt and its implications for development has indeed attracted much scholarly attention both in the developed and developing countries.  Empirical evidence is in abundance to indicate the public debt beyond a threshold level could have the dampening effect on growth. The threshold level, however, would vary from one country to another. Of late a discourse has emerged in Kerala focusing on borrowing, public debt and its fiscal implications on development. While such a discourse is highly desirable, much of it is based on casual empiricism. It is argued that Kerala's debt has been doubling on a five-yearly basis. What is more, the estimated per capita debt in Kerala is of the order of Rs 100,000 and a panic is being created in the minds of ordinary citizens. This article intends to set the stage for a more informed discussion on this important issue.

Public debt and private debt
The conventional wisdom talks against borrowing during times of crisis as the future income sources are uncertain, adding up to the overall burden. Therefore, it is advised to "tighten your belt" during times of crisis.  A household may cut back their expenditure during times of uncertainty. Common sense dictates that a government, either state or union, shall follow the same. But what is true of micro is rarely true of macro- the fallacy of composition error.
Hence, a prudent economic policy can never be framed by common sense and micro level evidence alone. The notion that a Government needs to cut back its spending as a policy response is called household fallacy (Farmer and Zabczyk,2018). They argue that the government is NOT like a household. Unlike households, the government can issue risk-free debt instruments to borrow money. Further, the potential revenue sources for a government are much diverse compared to an average household. Unlike households, the government invests in healthcare and education, something that increases the human capital stock. Yet another line of argument is that in case of domestic debt, interest payment is an income for the creditors in the economy, and its adverse impact would be limited provided the inflation is under control. For a government with a long-term development perspective, it might be advisable to borrow at present and invest by paying interest instead of making the future generation to pay for both inflation and interest rate.
FRBM: Centre and the states
With the FRBM Act in place, the debt-to-GDP ratio for the center was to be brought down to 40 percent by 2024-25 as per the 2018-19 FRBM review committee recommendations. For the State Governments, regardless of their characteristics like stage of development, it has been pegged at 20 percent. Going by the available evidence, the FRBM has been effective in containing public debt. While the States in general are moving towards the FRBM commitment, the Center is lagging behind. In 2019-20, the Union government posted a debt to GDP ratio of 48.6 percent whereas the state governments had a debt-to-GDP ratio of only 24.92 percent.

Source: State Finances: A Study of Budget, 2020-21, RBI.
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