Opinion For Centre & state finances, a reckoning
With the GST rate cuts clearly impacting revenues, the Centre will have to cut expenditures for meeting its deficit targets.
With the GST rate cuts clearly impacting revenues, the Centre will have to cut expenditures for meeting its deficit targets. 
2026 COULD be a year of reckoning for the finances of both the Centre and state governments. Data for April-November 2025-26 shows the Centre’s fiscal deficit touching 62.3 per cent of the full-year budget estimate, while it was 52.5 per cent during the corresponding eight months of 2024-25. More revealing is the primary deficit (fiscal deficit net of interest payments), which has hit 78.9 per cent of the whole-year (April-March) target, as against 41.8 per cent for April-November 2024-25. The pressure is mainly from tax revenues, with the Centre netting just 49.1 per cent of its budgeted collections till November. With the GST rate cuts clearly impacting revenues, the Centre will have to cut expenditures for meeting its deficit targets.
The challenge is even more for states. On December 30, Andhra Pradesh raised Rs 1,000 crore and West Bengal Rs 2,000 crore through 12- and 17-year government securities at 7.50 per cent and 7.56 per cent interest respectively. A year before, they had paid 7.16 per cent and 7.15 per cent for the same tenor securities to mop up Rs 1,500 crore and Rs 2,500 crore respectively. Interest rates on state borrowings have gone up, despite the RBI slashing its policy “repo” lending rate from 6.50 to 5.25 per cent over this period. The combined fiscal deficit of the states has risen from 2.4 to 3.2 per cent of GDP between 2018-19 and 2024-25 and the primary deficit, too, from 0.8 to 1.5 per cent. Many states today have outstanding liabilities exceeding 30 per cent of their GDP, with these at 35 per cent-plus for some — Punjab, Himachal Pradesh, West Bengal, Bihar, Kerala and Rajasthan. The moment of reckoning will come when bond markets actually start discriminating between fiscally responsible and cavalier governments.
The Indian economy is no longer plagued by the twin balance sheet crisis, with both debt-to-equity and non-performing asset ratios of corporates and commercial banks respectively dropping to multi-year lows. It cannot afford a weak government balance sheet next to act as a drag on growth, including through crowding out private sector borrowings. Governments should focus on their traditional functions of providing public goods and investing in physical and social infrastructure. Instead, they are spending taxpayer and borrowed monies increasingly on freebies and cash transfers yielding short-term electoral gains at best. Unfortunately, this seeming winning formula has been embraced or endorsed by parties across the board. 2026, hopefully, will be the year when the fiscal gravy train slows, if not stops.
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