Page 57 - CII-ARTHA

MARCH 2026

However, in the post-COVID era, central loans have also Changing Composition of State
gained prominence, driven largely by sustained GST
compensation loans (where the Centre borrowed on Finances: Patterns of Revenue
behalf of the states, but the liabilities were recorded in and Spending
state accounts). Further, part of the recent increase in
fiscal deficits reflects the inclusion of the Special On the expenditure side, revenue expenditure (net of
Assistance Scheme for Capital Investments which interest payment) constitutes the highest share of state
provides 50-year interest-free loans from the Centre, expenditure, with a pandemic-induced spike to
which is recorded within GFD, but represent 12.9 per cent in 2020–21 and a renewed increase to
policy-driven financing (capex spending) rather than 12.8 per cent in 2025–26 (BE). Interest payments have
underlying fiscal stress. Further, the share of loans from remained sticky at around 1.7–1.8 per cent of GSDP
other sources like financial institutions and public (2018-2026), reflecting the persistence of high debt
accounts has decreased steadily. However, given the levels and the limited decline in debt servicing
growing reliance on off-budget borrowings and obligations despite fiscal consolidation.
contingent liabilities, it is difficult to ascertain the actual
fiscal position of states.
Persistently high committed
States’ consolidated debt (total outstanding liabilities) expenditure (salaries, pensions,
declined to 28.1 per cent of GDP by end-March 2024, interest) limits fiscal flexibility
from a peak of 31 per cent in 2020-21, supported by fiscal despite rising capital outlay
consolidation and strong nominal GDP growth outpacing
debt accumulation. However, liabilities have remained
elevated around 29 per cent in 2025–26. This indicates Within the social sector spending, education and housing
that borrowing has not fully decreased to pre-pandemic expenditure declined while agriculture and social welfare
levels, even after the recovery phase, pointing to expenditure increased. However, social sector spending
persistent financing needs. This has begun to crowd out is expected to account for a significant share of revenue
developmental spending, particularly in states with expenditure, estimated at 8.2 per cent of GDP in 2025–26
weaker fiscal positions. (RBI State Finances Report, January 2026).

Expenditure of States (as a % of GDP)

2.1 2.8 3.0
2.3 2.1 2.3 2.2 2.5
1.9 1.8
1.7 1.7 1.8 1.7 1.7
1.7

12.3 12.1 12.9 12.3 12.1 11.7 12.7 12.8

2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 (RE) 2025-26 (BE)

Rev Expenditure excluding Interest Payment Interest Payments Capital Outlay

Source: RBI State Finances, January 2026
RECO: Ratio of Revenue Expenditure to Capital Outlay

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