Context:

• Understanding the fiscal position of states is essential for gauging India’s overall macroeconomic health.
• Therefore, analysing provisional actuals (PA) for FY2025 of 17 major Indian states (covering approximately 90% of India’s GDP) and highlighting trends in fiscal deficit, revenue deficit, and capital expenditure, offers insights into the evolving fiscal dynamics and implications for FY2026 and beyond.

Fiscal Trends in FY2025 (Provisional Actuals):

• Widening fiscal deficit:
  • Fiscal deficit is the excess of total expenditure of the Government over its non- debt receipts (revenue receipts, miscellaneous capital receipts and recovery of loans and advances).
  • It normally represents the net incremental liabilities of the Government or its additional borrowings.
  • FY2025 fiscal deficit of 17 states rose to ₹9.5 trillion (3.2% of GSDP) from ₹7.8 trillion (2.9% of GSDP) in FY2024.
  • The deterioration was largely driven by an increase in revenue deficit, with a smaller contribution from capital spending.
• Surge in revenue deficit:
  • Revenue deficit is the excess of revenue expenditure of the Government over its revenue receipts. It leads to increase in borrowings without corresponding capital/asset formation.
  • Revenue deficit nearly doubled to ₹2.1 trillion (0.7% of GSDP) in FY2025 from ₹1.1 trillion (0.4% of GSDP) in FY2024.
  • This resulted from -
    • Slower growth in revenue receipts (6.3% in FY2025 vs 7.9% in FY2024).
    • Stable revenue expenditure growth at 9% year-on-year (YoY).
• Negative implications of rising revenue deficit:
  • In contrast to the Centre’s fiscal compression, states witnessed revenue pressure.
  • Higher share of revenue deficit in total fiscal deficit indicates less room for productive capital expenditure.
  • Capex share in fiscal deficit declined to 78% in FY2025, below the 80–90% trend in FY2022–24.

Capital Expenditure Dynamics:

• Overall capex performance:
  • Total capital spending - ₹7.4 trillion in FY2025 PA, ₹678 billion higher than the amount spent in FY2024.
  • However, 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.
  • Capex fell short of Revised Estimates by ₹1.1 trillion.
• March 2025 capex surge:
  • In March 2025, the states’ capex surged by 42% YoY to Rs 2.2 trillion from Rs 1.5 trillion in March 2024, led by a pick-up in spending by UP, Andhra Pradesh, MP, Maharashtra, Tamil Nadu and Karnataka.
  • 30% of annual capex was incurred in March alone—indicative of back-loaded spending and corresponding spike in state government securities borrowing.
• Role of Centre’s Capex Loan Scheme: Capex loan disbursement -
  • ₹1.5 trillion in FY2025 (up from ₹1.1 trillion in FY2024).
  • 17 states’ share - estimated at ₹1.13 trillion (up from ₹0.8 trillion).
  • Funded over 40% of FY2025's incremental capex for these states.

Budgeted Projections for FY2026 and Future Outlook:

• FY2026 capex targets:
  • For the budget estimates of FY2026, 17 states have indicated capital spending of Rs 9.5 trillion, 29.2% higher on a YoY basis or an incremental spending of Rs 2.1 trillion in FY2026, relative to the FY2025 PA.
  • This seems a little unrealistic given that it is double the average incremental capital expenditure of Rs 1 trillion during FY2022-FY2024.
• Long-term challenges and reforms:
  • Recommendations of Finance Commission, Pay Commission, and changes in GST compensation cess will significantly impact state finances.
  • Policies incentivising capex over revenue expenditure within the fiscal space are crucial.