Bengaluru : The analysis of FY25 budgets for 21 states, together representing over 95% of India’s GDP (Rs 326 lakh crore in FY25BE), reveals important insights into their financial health. The average GDP growth for these states is projected at 11.2%, down from 11.8% in FY24RE, with significant inter-state variation (0.6% for MP to 22.1% for Mizoram), exceeding India’s budgeted growth of 10.5%.
Total receipts are expected to rise by a four-year low of 10.2% to Rs 43.4 lakh crore (+16.7% in FY24RE), with revenue receipts (99% of total receipts) rising by 10.6%.
This growth is primarily driven by a strong, albeit sequentially lower, 15% rise in states’ own revenues (tax and non-tax) to Rs 25.8 lakh crore, partly offset by lower devolution and grants from the Centre.
Tax buoyancy for these states is expected to remain steady at 1.3x in FY25BE, surpassing the Centre’s 1.0x.
After three years of strong growth, capital spending by states is expected to moderate in FY25, growing by a modest 6.5% to Rs 6.5 lakh crore, down from a strong 39.3% growth in FY24RE. The capital-to-revenue expenditure ratio, a measure of expenditure quality, is set at 20.7% for FY25BE, declining from 21.2% in FY24RE. Punjab has the lowest ratio at 6.2%, while Gujarat leads at 36.2%.
Revenue expenditure is also budgeted to increase by a four-year low of 8.9% to Rs 44.2 lakh crore. Committed expenditure (interest payments and pensions), on the other hand, remains high, comprising about 24% of total revenue expenditure and consuming nearly a quarter of revenue receipts. Punjab, Kerala, Himachal Pradesh, and Tamil Nadu have allocated over 35% of their revenue receipts to committed expenditure in FY25.
The overall fiscal deficit of these 21 states is pegged at Rs 10 lakh crore or 3.2% of their GSDP in FY25BE vs. 3.5% in FY24RE, above the recommended 3.0% by the 15th Finance Commission. Eight of these 21 states have budgeted for a sub-3% fisc, led by Jharkhand (2%), Gujarat (2.5%) and Maharashtra (2.6%). Nearly 79% of this deficit is expected to be funded through market loans, with gross borrowings rising by 7% to Rs 10.8 lakh crore. States’ reliance on market loans has dropped in the recent years, thanks to higher loans from the Centre.
Outstanding liabilities to GDP ratio at 29% in FY22 for our sample states may rise to ~33% after accounting for contingent liabilities (states’ guarantees to SPSEs). In our sample, UP accounts for over 19% of the overall contingent liabilities, followed by Telangana at 15% and Andhra Pradesh at 13%.
With states contributing only 30% of total tax revenues but accounting for over 60% of total general government expenditure, improving their financial positions has become increasingly critical.
Our analysis highlights the need for a clear fiscal consolidation roadmap for fiscally strained states, a gradual reduction in contingent liabilities to enhance transparency, improved fiscal credibility, and risk-based pricing for State Development Loans (SDLs). These measures are essential for the long-term fiscal health of states, ensuring they are adequately equipped to address exigencies and emerging priorities in an ever-changing landscape.
