Despite the initiatives of the Finance Commission of India, fiscal performance has been deteriorating and increasingly diverging across Indian states. Given that the state governments are endowed with expenditure autonomy, this chapter investigates whether the composition of expenditure of the subnational governments has an impact on the degree of indebtedness. A panel analysis for the 17 non-special category states over 1980–2013 indicates that apart from the budget structure, the state-specific factors affecting fiscal performance play an important role in government borrowing. Curiously enough, government borrowing is more responsive to revenue expenditure than capital outlay and has more growth-augmenting effect through revenue expenditure. © Asian Development Bank Institute 2017. All rights reserved.