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ARTHA

State Finances in Transition:

Deficits, Debt, and

Fiscal Space

S tate governments anchor India’s fiscal widening in the fiscal deficit has occurred alongside
an increase in capital expenditure, suggesting an
architecture with their combined expenditure
exceeding that of the Centre, particularly in
core development sectors such health, education, improvement in expenditure quality even as fiscal
pressures persist.
infrastructure, and welfare. Their fiscal position
therefore has a direct and significant bearing on States are facing expanding expenditure obligations,
development outcomes, macroeconomic stability and particularly committed spending on salaries,
cooperative federalism. pensions, and interest payments, even as their
revenue autonomy remains constrained. The GST
Following the pandemic-induced spike in fiscal deficit regime has reduced independent taxation space for
1
(around 4.1 per cent of GDP in 2020–21), states the states, increasing reliance on central devolutions
undertook a phase of consolidation, with deficits and grants. At the same time, states operate within
falling below 3 per cent during 2021–24. However, this tight fiscal limits under the Fiscal Responsibility and
improvement was short-lived. The consolidated gross Budget Management (FRBM) framework, with deficit
fiscal deficit has edged up again to about 3.3 per cent targets of around 3 per cent of GSDP. States are
in 2024–25 and is budgeted at a similar level for provided with an additional fiscal deficit space of
2025–26, driven by slower revenue growth and 0.5 per cent of GSDP conditional on the
sustained expenditure commitments. Notably, this implementation of power sector reforms by the states.

1 For all GDP related calculations, the old GDP series with 2011-12 base has been used.

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