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• PRS Legislative Research has released the State of State Finances 2025 report, which highlights the financial stability, revenue capacity, and expenditure patterns of Indian states.

Key Findings

Fiscal Deficit Control

• States collectively maintained their Gross Fiscal Deficit (GFD) close to the FRBM (Fiscal Responsibility and Budget Management) target of 3% of GDP.
• For FY 2024-25, the GFD is estimated at 3.2% of GDP, which is within a manageable range.

Increase in Capital Expenditure

• Capital expenditure by states has been rising consistently.
• As per budget estimates for 2024-25, it has reached 3.1% of GDP, indicating a growing focus on development-oriented investment.

Reduction in Debt

• The total outstanding debt-to-GDP ratio of states decreased from 31% in March 2021 to 28.5% in March 2024 (though still higher than pre-pandemic levels).

Major Challenges and Risks

High Committed Expenditure :

• States spent about 62% of their revenue receipts in 2023-24 on committed expenditures such as salaries, pensions, interest payments, and subsidies.
• This leaves limited fiscal space for productive capital investment.

Rising Debt Burden :

• The outstanding debt level of states (28.5% of GDP) remains significantly above the FRBM target of 20%.
• Except for Gujarat, Maharashtra, and Odisha, most states exceed this limit.
• Interest payments are rising at an annual rate of about 10%, outpacing revenue growth.

Expansion of Subsidy Schemes :

• Several states are expanding direct cash transfer schemes, particularly targeted at women.
• Such schemes are expected to be implemented in 12 states by 2025-26, increasing financial pressure.
• High expenditure continues on electricity subsidies and agricultural loan waivers.

Decline in GST Revenue Share:

• After GST implementation, states’ revenue from GST-covered taxes (as % of GDP) declined from 6.5% in 2015-16 to 5.5% in 2023-24.
• The share of untied central transfers has also reduced, limiting states’ spending autonomy.

Key Recommendations:

• Debt Consolidation: Formulate a clear and transparent policy to bring down debt levels.
• Rationalisation of Subsidies: Reduce non-productive and free subsidy schemes to create fiscal room for productive capital expenditure.
• Enhancing Revenues: Increase non-tax revenues (e.g., user charges, mining royalties) and streamline GST rate slabs.
• Fiscal Transparency: Ensure uniform and transparent reporting of off-budget borrowings and government guarantees.