Opinion What state finances tell us about the economy
Assistance by Centre has played a key role in boosting capital expenditure of states but borrowing space is limited
In FY2025, Rs 1.5 trillion was disbursed as capex loans to all states, up from Rs 1.1 trillion in FY2024. 
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The fiscal health of the Centre and the states is a key part of the overall macro picture. This article analyses the fiscal trends for a large sample of 17 state governments (excluding Arunachal Pradesh, Assam, Bihar, Goa, Himachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Tripura and Sikkim) for FY2025 and what they augur for the current fiscal and the medium term. These states account for about 90 per cent of India’s GDP. Typically, a wide variation has been observed in the states’ actual fiscal metrics relative to the Budget and Revised Estimates. Therefore, the focus here is on the trends revealed by the provisional actuals (PA) for FY2025 relative to the actual position in the previous year.
The FY2025 PA indicates a widening in the combined fiscal deficit of 17 states to Rs 9.5 trillion (3.2 per cent of the Gross State Domestic Product or GSDP) from Rs 7.8 trillion (2.9 per cent of GSDP) in FY2024. This was driven by the near-doubling of their revenue deficit to Rs 2.1 trillion (0.7 per cent of the GSDP) in FY2025 PA from Rs 1.1 trillion (0.4 per cent of GSDP) in FY2024, and to a relatively smaller extent by a rise in capital spending (by Rs 678 billion or 0.2 per cent of GSDP).
The spike in revenue deficit levels in FY2025 was due to a moderation in the pace of growth of revenue receipts, which increased to 6.3 per cent in FY2025 from 7.9 per cent in FY2024, amid a stable year-on-year rise of 9 per cent in revenue expenditure.
The rise in the states’ revenue deficit in FY2025 is in contrast to the compression at the Centre. A higher share of revenue deficit in the fiscal deficit is not a favourable outcome for state finances. This indicates that the limited borrowing space is partly used towards funding the revenue expenditure, which tends to be less productive compared to capital spending. For instance, the total capital spending of the 17 states in FY2025 PA comprised 78 per cent, lower than the trend during FY2022-24, wherein 80-90 per cent of the fiscal deficit was attributed to capex.
The combined capital spending of the 17 states was Rs. 7.4 trillion in FY2025 PA, Rs 678 billion higher than the amount spent in FY2024. The incremental capex of the states in FY2025 PA was sharply lower than the incremental spending of Rs 910-1,120 billion during FY2022-FY2024. Another discouraging trend is the undershooting in capex relative to the Revised Estimates (RE) by Rs 1.1 trillion, once again in contrast to the overshoot seen for the Centre. The capex of the states in FY2025 till the end of February was lower than the spending in the previous year. In March 2025, the states’ capex surged by 42 per cent YoY to Rs 2.2 trillion from Rs 1.5 trillion in March 2024, led by a pick-up in spending by Uttar Pradesh, Andhra Pradesh, Madhya Pradesh, Maharashtra, Tamil Nadu and Karnataka. As much as 30 per cent of the annual combined capex of the sample states was incurred in March 2025, much higher than the proportion of spending seen in March 2024. Incidentally, back-ended capex is one of the reasons that the states’ borrowing through state government securities tends to spike in March.
The amounts disbursed by the GoI to the states under the special assistance for capital expenditure (capex loan scheme) in recent years have played a key role in boosting spending on capex. In FY2025, Rs 1.5 trillion was disbursed as capex loans to all states, up from Rs 1.1 trillion in FY2024. Based on the previous shares, the proportion of 17 states in the capex loan in FY2025 is estimated at Rs 1.13 trillion, up from Rs 0.8 trillion in FY2024. This suggests that the increase in the capex loan funded over 40 per cent of the incremental capital spending of the sample set in FY2025.
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For the budget estimates of FY2026, 17 states have indicated capital spending of Rs 9.5 trillion, 29.2 per cent higher on a YoY basis or an incremental spending of Rs 2.1 trillion in FY2026, relative to the FY2025 PA. This is double the average incremental capex of Rs 1 trillion during FY2022-FY2024, and appears somewhat implausible.
Beyond FY2026, the recommendations of the Finance and Pay Commissions, as well as changes related to GST compensation cess, will cast an indelible mark on the evolution of state finance. Any incentives towards maximising capex within the permitted borrowing space and fiscal deficit anchor would certainly be valuable.
The writer is chief economist, head- Research & Outreach, ICRA
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