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The fiscal health of India’s states plays a critical role in the nation’s overall economic growth. Capital expenditure (CAPEX) is particularly important, as it creates long-term assets and generates revenue for years. On October 15, 2024, the National Stock Exchange (NSE) released its report titled “State of States,” which examines the fiscal conditions of 21 Indian states: Andhra Pradesh, Assam, Bihar, Chhattisgarh, Gujarat, Haryana, Himachal Pradesh, Jharkhand, Karnataka, Kerala, Meghalaya, Madhya Pradesh, Maharashtra, Mizoram, Odisha, Punjab, Rajasthan, Tamil Nadu, Telangana, Uttar Pradesh, and West Bengal.

The report provides a comprehensive overview of the states’ financial health, focusing on both capital and revenue expenditures. Let’s dive into the key highlights and analysis.

Revenue Receipts Expected to Grow by 10.6% in FY25

The budget analysis for FY25 reveals that these 21 states, which represent over 95% of India’s GDP (estimated at  Rs.326 lakh crores), are projected to see average GDP growth of 11.2%, compared to 11.8% in FY24, with significant variation across states—from 0.6% in Madhya Pradesh to 22.1% in Mizoram. This surpasses India’s national budgeted growth of 10.5%.

Total income (receipts) for the states is forecasted to grow by 10.2%, reaching Rs.43.4 lakh crore, marking a four-year low compared to the 16.7% growth in FY24. Revenue receipts, which account for 99% of total income, are expected to rise by 10.6%, driven by a solid 15% increase in states’ own tax revenues (taxes and non-taxes). However, lower central devolution and reduced subsidies/grants from the central government are likely to moderate this growth. Tax buoyancy for the states is expected to remain steady at 1.3 times in FY25, exceeding the Centre’s 1.0 times.

Slowdown in State Capital Expenditure

State capital expenditure is expected to slow significantly, growing by just 6.5% to Rs. 6.5 lakh crore in FY25, down from a robust 39.3% growth in FY24. This marks the end of three years of strong CAPEX expansion. The capital revenue-expenditure ratio, a key indicator of spending quality, is projected at 20.7% for FY25, down from 21.2% in FY24. Gujarat leads with the highest ratio (36.2%), while Punjab has the lowest (6.2%).

Revenue expenditure is also projected to grow at a four-year low of 8.9%, reaching Rs.44.2 lakh crore. Committed expenditures, such as pension and interest payments, continue to weigh heavily on states, accounting for about 24% of total revenue expenditure and nearly 25% of revenue receipts. States like Punjab, Kerala, Himachal Pradesh, and Tamil Nadu have earmarked more than 35% of their revenues for such commitments.

Fiscal Deficits Pegged at 3.2% in FY25

The combined fiscal deficit of the 21 states is projected at Rs. 10 lakh crore, or 3.2% of their GSDP, in FY25—slightly lower than the 3.5% recorded in FY24 but still above the 3% target recommended by the 15th Finance Commission. Eight states, including Jharkhand (2%), Gujarat (2.5%), and Maharashtra (2.6%), have pegged their deficits below 3%.

Moderation in States’ Indebtedness

After reaching a 15-year high of 31.1% of GSDP in FY21, the total outstanding liabilities of states declined to 29.3% in FY22 and are expected to further drop to 27.5% in FY23. The FY24 budgeted liabilities-to-GSDP ratio is stable at 27.6%, though still higher than the pre-COVID level of 25.3% in FY19.

However, the pace of debt reduction has been slow and uneven. Punjab (47.6%), West Bengal (38.3%), Bihar (37%), Kerala (36.9%), and Rajasthan (35.7%) have the highest levels of indebtedness, while states like Delhi (1.7%), Odisha (13.9%), Gujarat (18.2%), and Maharashtra (18.6%) have the lowest.

Market Borrowings to Fund 79% of the Deficit

In FY25, it is estimated that 79% of the fiscal deficit will be financed through market borrowings, with gross borrowing rising by 7% to Rs. 10.8 lakh crore. Although states have become less dependent on market borrowings in recent years, contingent liabilities, such as state guarantees for public sector enterprises (SPSEs), remain a concern. These liabilities could push the states’ debt-to-GDP ratio from 29% in FY22 to around 33%. Uttar Pradesh holds the largest share of contingent liabilities, accounting for over 19%, followed by Telangana (15%) and Andhra Pradesh (13%).

Divergence in Expenditure Across States

The report highlights significant disparities in spending among states. Six out of the 21 states spent less than 90% of their budgeted targets in FY24. Punjab spent only 59%, while Telangana spent 77%. Four states spent between 90% and 100% of their budgets, while 11 states exceeded their budgeted amounts.

In terms of capital expenditure, six states—including Bihar, Madhya Pradesh, and Maharashtra—have budgeted a contraction for FY25. These three states alone account for 20% of the total capital expenditure of the 21 states under review. Nonetheless, large states such as Gujarat (29.6%), Rajasthan (26.1%), Odisha (24.5%), and Tamil Nadu (24.0%) have budgeted strong growth in capital expenditure.

Improving States’ Financial Health

Improving the financial health of states has become more critical as states account for over 60% of total government expenditure but contribute only 30% to total tax revenue. The NSE report emphasizes the need for a clear fiscal consolidation roadmap for states facing financial strain, a gradual reduction in contingent liabilities, improved fiscal transparency, and risk-based pricing for State Development Loans (SDLs). These measures are essential for the long-term financial stability of states, ensuring they are well-prepared to address future challenges.

Conclusion

Comparing state finances is a complex task, and the report focuses only on 21 states, excluding others and union territories, which could affect the overall findings. Despite this, the report offers valuable insights, particularly regarding the reduced dependency of states on market borrowings in recent years—a positive sign for improving their financial health.

However, the report also raises concerns about the moderation of state CAPEX in FY25. With states accounting for 68% of development expenditure, a slowdown in CAPEX could negatively impact overall growth. Additionally, reducing contingent liabilities remains crucial for maintaining fiscal health and addressing expenditure challenges. The persistent gap between budgeted, revised, and actual estimates of state finances also needs to be addressed to improve fiscal credibility and ease the work of analysts and institutions.