India Ratings and Research on Wednesday maintained a neutral outlook on Indian states’ finances for FY27, projecting the aggregate fiscal deficit at 3.5% of gross domestic product (GDP), as higher revenue spending offsets sustained capital outlay. 

The agency said the projected deficit for FY27 would be higher than the 3.0% estimated for FY26 but added that excluding capital spending under the Special Assistance to States for Capital Investment (SASCI) scheme, the deficit would remain aligned with the 16th Finance Commission’s road map of 3.0% of GDP. 

Ind-Ra expects states’ capital expenditure to grow 16.4% year-on-year in FY27, with the capex-to-GDP ratio rising to 2.9% from 2.7% in FY26. “The strong focus on capital expenditure is underpinned by the INR1.85 trillion allocation under the SASCI scheme in the FY27 union budget and the incentive structure under the 16th FC roadmap, which excludes SASCI loans from the fiscal deficit limit of 3.0% of gross state domestic product (GSDP). The continued focus on capital expenditure will bolster medium-term growth and support fiscal stability,” said Anuradha Basumatari, Director, Public Finance, Ind-Ra.

The Centre has allocated ₹1.85 lakh crore in interest-free loans under the SASCI scheme for FY27, encouraging states to sustain asset creation without breaching deficit thresholds. 

Revenue growth moderates, grants decline 

According to provisional data from the Comptroller and Auditor General for 24 states for April–December 2025, aggregate revenue receipts were weighed down by a fall in central grants. 

Tax revenue rose 9.5% year-on-year to ₹25.2 lakh crore during the period, largely driven by tax devolution from the centre. States’ share in central taxes increased 14.8% to ₹8.5 lakh crore while states’ own tax revenue grew 7.0% to ₹16.7 lakh crore. 

Ind-Ra expects aggregate revenue receipts to grow 9.0% in FY27, compared with 6.8% in FY26, supported by own tax collections and tax devolution. The states’ share in the net proceeds of union taxes remains at 41% for FY27–FY31 under the 16th Finance Commission’s recommendations. The FY27 union budget allocates ₹15.3 lakh crore as states’ share in central taxes, up 9.6% from the revised estimate for FY26. 

However, grants-in-aid have contracted sharply, declining 15.8% in FY25 and 18.0% year-on-year in April–December FY26. With the 16th Finance Commission recommending the discontinuation of post-devolution revenue deficit grants from FY27, Ind-Ra said states would increasingly depend on their own revenues to meet spending needs. 

Welfare spending to lift revenue expenditure 

Ind-Ra projects revenue expenditure to grow 11.2% year-on-year in FY27, led by welfare schemes and additional cost-sharing requirements under the Viksit Bharat – Guarantee for Rozgar and Ajeevika Mission (Gramin) Act, 2025. 

The union government has allocated ₹956.9 billion for the programme in FY27, implying a potential aggregate cost-sharing burden of ₹555.9 billion for states. The agency expects higher incremental spending in Andhra Pradesh, Bihar, Madhya Pradesh, Maharashtra, Odisha, Rajasthan, Tamil Nadu, and Uttar Pradesh. 

As a result, the revenue deficit is projected to widen to 0.7% of GDP in FY27 from 0.4% in FY26, partly reflecting higher welfare spending in election-bound states. 

Debt ratio edges up; borrowings to fund deficit 

States’ aggregate debt is projected to rise to 29.8% of GDP in FY27 from 29.0% in FY26, driven by higher capital outlays, including those funded under SASCI. 

Ind-Ra estimates gross market borrowings at ₹13.8 trillion and net borrowings at ₹9.6 lakh crore in FY27, financing about 71% of the fiscal deficit. The lower share compared with historical averages reflects partial capex funding through interest-free central loans. 

Despite rising revenue pressures, the agency said continued prioritisation of capital spending would support medium-term growth and help maintain fiscal stability within the broader consolidation road map.