The fiscal deficit of the 20 states stood at 2.9 per cent of GDP in FY24 and 2.8 per cent of GDP in FY23
The fiscal deficit of the 20 largest states is likely to be 2.8% of GDP in FY25, down from the budgeted 3.2%, as expenditure growth is expected to slow during the year, according to an Axis Bank research.
“Actual deficits have been 0.5-0.9 pp (percentage points) of GDP below revised estimates (RE) every year since FY18, and are often below BE as well, primarily due to slippage on expenditure,” said the report.
The budget deficit for the 20 states was 2.9% of GDP in FY24 and 2.8% of GDP in FY23.
According to the paper, for the debt-to-GDP ratio to fall appreciably, states must reduce the aggregate budget deficit to less than 2.5% of GDP.
The debt crisis is significantly more serious in Punjab, Himachal Pradesh, Rajasthan, Kerala, Bihar, and West Bengal, where the debt percentage exceeds 35%, according to an Axis Bank analysis.
According to the research, capital expenditure in these states is predicted to expand at a 22% compound annual growth rate between FY 23 and FY 25, increasing its proportion of spending to 16% in FY25, the most since FY09.
Rajasthan, Gujarat, and Odisha forecast capex in FY25 to be roughly double that of FY23, whereas Karnataka, Bihar, Punjab, and Kerala have planned for slow growth.
According to the report, certain states, like as Kerala and Punjab, are facing fiscal challenges, while others have altered priorities or lack execution skills.
However, the report stated that ongoing state spending, particularly capital expenditures, should help overall economic growth.
According to the analysis, nearly two-thirds of incremental capex will be incurred in only five states: Uttar Pradesh, Gujarat, Odisha, Andhra Pradesh, and Maharashtra.
The states’ revenue receipts for FY25 are expected to increase by 9% over the FY24 Revised Estimate (RE). Non-tax receipts are likely to shrink year on year in FY25, owing mostly to a decrease in central grants in FY24-25, according to the report. The report stated that while central devolution has surprised positively, grants have been lower than projected and are expected to reduce year on year in the FY25 Budget Estimate (BE).
The Centre delivered Rs 1.4 trillion in tax devolution to states on Monday, including an additional instalment beyond the customary June distribution, to allow state governments to accelerate development and capital investment.
“Despite the planned decline in central grants in FY25, the states’ overall spending is set to grow faster than nominal GDP, funded by strong growth in own tax revenues,” said the research.
The allocation of revenue receipts between own sources and central transfers varies greatly across states. For example, in Haryana and Maharashtra, own taxes account for 71%, but in Bihar and Himachal Pradesh, they account for only 26%.
The research also stated that in order for the debt ratio to fall appreciably, governments must reduce their aggregate fiscal deficit to less than 2.5 percent of GDP.