Combined state expenditure set to exceed Centre's outlay in FY27 at ₹64 lakh crore: Report

Combined budgeted expenditure of 23 Indian states is projected to exceed that of the Centre in FY27, underscoring the growing role of states in driving public spending and economic development, while fiscal deficits remain broadly within prudential limits, according to a Bank of Baroda report.

The report, based on monthly Comptroller and Auditor General (CAG) accounts, said the 23 states covered in the study have budgeted a combined expenditure of nearly ₹64 lakh crore for FY27, compared with the Centre's projected outlay of ₹53.5 lakh crore. "States play a pivotal role not only in raising revenues but also in delivering public services, given their closer interface with citizens," the report noted.

Among the states, Uttar Pradesh, Maharashtra, Tamil Nadu, Karnataka, and Rajasthan account for nearly 45% of the total projected expenditure. The combined spending of the top 13 states, up to Kerala, is roughly equivalent to the Centre's budget, reflecting India's strong federal structure.

Combined liabilities pegged at ₹29.2 lakh crore

The report estimates that the combined gross liabilities of the Centre and states through market borrowings, small savings and other capital funding sources will stand at ₹29.18 lakh crore in FY27.

It said the borrowing programme remains broadly aligned with the fiscal responsibility framework laid down under the Fiscal Responsibility and Budget Management (FRBM) Act.

Most states remain within FRBM deficit norms

The report highlighted that the aggregate fiscal deficit of 22 states is budgeted at 3.1% of GSDP, lower than the Centre's projected fiscal deficit of 4.3% of GDP. Fiscal deficit targets vary widely across states, ranging from 2% in Gujarat to 4.6% in Jammu & Kashmir.

Of the 22 states analysed, 10 have targeted fiscal deficits around the FRBM benchmark of 3%, while the five states with the largest absolute fiscal deficits have all budgeted deficit ratios of 3% or lower, helping keep the aggregate state deficit under control.

Among the states with relatively higher deficit targets are Punjab and Chhattisgarh, both above 4% while Rajasthan has targeted 3.7%. Andhra Pradesh, Madhya Pradesh, Odisha, Uttarakhand, and Mizoram have fiscal deficit targets between 3.5% and 4% while Kerala, Meghalaya and Himachal Pradesh have budgeted deficits of 3.5%.

GST, fuel taxes remain key revenue sources

The report said states continue to rely heavily on GST, value-added tax (VAT) on petroleum products, excise duties on liquor and tobacco, along with tax devolution from the Centre and non-tax revenues.

It noted that southern states generally derive a larger share of tax revenues from VAT and excise due to higher fuel consumption and greater taxation on petroleum products and alcohol.

By contrast, Gujarat, Bihar, and Mizoram have relatively lower shares of VAT and excise revenues because of prohibition policies.

GST reflects consumption trends across states

GST accounts for an average 32.1% of total tax revenue for the states covered in the report, compared with 23.1% for the Centre, although the two figures are not directly comparable because the Union government also collects significant revenues from direct taxes and customs duties.

The report said a higher GST share generally reflects stronger household consumption. Jammu & Kashmir has the highest GST contribution to tax revenue at 63%, followed by Haryana, Karnataka, Bihar, Uttar Pradesh, Kerala, Maharashtra, Gujarat, Telangana and Andhra Pradesh.

The report observed that while higher-income states naturally report stronger consumption, Bihar's high GST dependence indicates rising household spending despite relatively lower per capita income. In the absence of significant excise collections due to prohibition, GST has become Bihar's principal source of tax revenue.

Real estate boosts stamp duty collections

Stamp duty and registration fees account for an average 8.4% of tax revenues across states. The highest shares are reported by Haryana (15.5%), Maharashtra (13.4%), Tamil Nadu (10.9%), Telangana (10.8%), Karnataka (10.2%), and Andhra Pradesh (9.8%), indicating robust real estate activity and higher property transactions.

Capex remains a key policy focus

The report said two expenditure indicators remain critical for assessing state finances—capital expenditure and committed expenditure, which includes salaries, pensions, interest payments, and subsidies.

While higher capital expenditure supports infrastructure creation and encourages private investment, lower committed expenditure provides governments with greater fiscal flexibility to undertake development spending, the report added.