India’s states are facing renewed fiscal pressure, with the aggregate fiscal deficit rising to 3.3% of Gross State Domestic Product (GSDP) in FY25 (provisional accounts), after remaining within the 3% mark for three consecutive years, according to a recent report by CareEdge Ratings. 

The report noted that the “aggregate fiscal deficit-to-GSDP has been on an upward trend since FY24,” signalling a gradual weakening in state finances. Seven of the 17 large states analysed recorded fiscal deficits above 3.5% of GSDP in FY25. These include Bihar, Andhra Pradesh, Chhattisgarh, Madhya Pradesh, Punjab, Rajasthan, and Kerala. 

Debt remains sticky 

While fiscal pressures have intensified, debt consolidation has seen modest improvement from pandemic peaks. Aggregate debt-to-GSDP moderated to 28.4% in FY25 (revised estimates) from 31% in FY21. However, this remains well above the 20% level recommended by the FRBM Review Committee. States such as Punjab, West Bengal, Bihar, and Rajasthan continue to carry particularly high debt burdens. 

Despite elevated debt, interest payments as a share of revenue receipts have moderated in the post-pandemic period. The report highlighted that the Centre’s 50-year interest-free loans for capital expenditure have “played a pivotal role in lowering the debt repayment burden of the states.” Between FY24 and FY26, a fiscal deficit of close to 0.4–0.5% of GSDP was financed through such loans, providing breathing room for state finances. 

Revenue pressures mount as GST flows moderate 

On the revenue front, aggregate revenue receipts declined to 12.2% of GSDP in FY25 from 13.7% in FY22, largely due to lower grants from the Centre. Non-tax revenues moderated sharply, with central grants falling to 1.2% of GSDP compared to a pre-pandemic average of 2.4%. GST compensation cess flows have also reduced significantly, falling to ₹0.1 lakh crore in FY25 from ₹1.4 lakh crore in FY21. 

As a result, states have stepped up efforts to boost their own revenues. The share of own revenue in total receipts rose to 58.2% in FY25 from a pre-pandemic average of 55.3%. 

On expenditure, capital outlay improved to 15.3% of total spending in FY25, higher than the pre-pandemic average of 13.5%. However, social sector spending increased sharply to 8% of GSDP, partly due to higher cash transfers.