Context

Assessing the fiscal performance of Indian states is vital to understanding the country’s overall macroeconomic health. An analysis of provisional actuals (PA) for FY2025 from 17 major states—representing about 90% of India’s GDP—offers valuable insights into trends in fiscal and revenue deficits as well as capital expenditure. This analysis provides crucial implications for FY2026 and future fiscal strategies.

Fiscal Trends in FY2025 (Provisional Actuals)

A. Rise in Fiscal Deficit

• Definition: The fiscal deficit represents the gap between total government expenditure and non-debt receipts (including revenue receipts, recoveries of loans, and miscellaneous capital receipts).
• FY2025 Data: Fiscal deficit rose to ₹9.5 trillion (3.2% of GSDP) from ₹7.8 trillion (2.9% of GSDP) in FY2024.
• Key Driver: This increase was primarily due to a significant rise in the revenue deficit, with a relatively smaller impact from capital expenditure.

B. Surge in Revenue Deficit

• Definition: Revenue deficit is the shortfall of revenue receipts compared to revenue expenditure, indicating borrowing used for non-asset-forming activities.
• FY2025 Figures: Revenue deficit nearly doubled to ₹2.1 trillion (0.7% of GSDP), up from ₹1.1 trillion (0.4% of GSDP) in FY2024.
• Contributing Factors:
• Slower growth in revenue receipts: 6.3% in FY2025 vs 7.9% in FY2024.
• Stable growth in revenue expenditure: 9% year-on-year.
• Implications:
• States experienced revenue strain even as the Centre pursued fiscal consolidation.
• A larger share of revenue deficit in the fiscal deficit indicates reduced scope for productive capital investments.
• The capex share of the fiscal deficit dropped to 78%, down from the usual 80–90% range observed during FY2022–24.

Capital Expenditure (Capex) Trends

A. Overall Capex Performance

• Total capital outlay in FY2025 (PA): ₹7.4 trillion, an increase of ₹678 billion over FY2024.
• However, the incremental increase in FY2025 was significantly lower than the ₹910–1,120 billion range recorded during FY2022–FY2024.
• States fell short of their Revised Estimates by ₹1.1 trillion, indicating underperformance.

B. Surge in March 2025 Capex

• In March 2025, capex jumped 42% YoY to ₹2.2 trillion, up from ₹1.5 trillion in March 2024.
• This last-month spike was driven by major states such as Uttar Pradesh, Andhra Pradesh, Madhya Pradesh, Maharashtra, Tamil Nadu, and Karnataka.
• 30% of the annual capex occurred in March alone, suggesting back-loaded spending and a corresponding rise in state government securities borrowings.

C. Impact of Centre’s Capex Loan Scheme

• Disbursement under the scheme rose to ₹1.5 trillion in FY2025, up from ₹1.1 trillion in FY2024.
• The 17 analysed states received around ₹1.13 trillion, compared to ₹0.8 trillion in FY2024.
• This central support accounted for over 40% of the incremental capex in FY2025 for these states.

FY2026 Budget Estimates and Forward Outlook

A. FY2026 Capital Expenditure Targets

• Budget estimates for FY2026 project capital spending of ₹9.5 trillion, reflecting a 29.2% year-on-year increase.
• This implies an additional ₹2.1 trillion in capex over FY2025 provisional actuals.
• However, this target appears ambitious, as it is double the average annual incremental capex of ₹1 trillion recorded between FY2022 and FY2024.

B. Long-Term Fiscal Challenges and Policy Priorities

• Structural reforms such as those proposed by the Finance Commission, Pay Commission, and adjustments related to the GST compensation cess will significantly impact state finances.
• Going forward, it is essential to adopt fiscal policies that prioritise capital expenditure over revenue spending to ensure sustainable economic growth within limited fiscal space.

Conclusion

The fiscal trajectory of Indian states in FY2025 reveals increasing stress on revenue accounts and back-loaded capital investments, despite support from the Centre. While the push for higher capital outlays in FY2026 is encouraging, its feasibility remains uncertain. Strengthening fiscal discipline, improving the efficiency of public spending, and aligning fiscal policies with long-term developmental priorities will be key to ensuring balanced and resilient state finances.