The combined fiscal deficit of 19 large Indian states, excluding north-east states and Goa, has increased to 3.2% of gross state domestic product (GSDP) in FY25 provisional actuals (PA) from 2.8% in FY22 due to dua pressures of higher revenue deficits and elevated capital spending, a report by ICRA on state government finances revealed.
Despite an increase in welfare spending, these states’ combined revenue deficit edged up only mildly to 0.7% of GSDP in FY25 PA, from 0.5% in FY22.
On a positive note, capital expenditure showed strong momentum. The combined capex of these 19 states grew at a robust compound annual growth rate (CAGR) of 16% from FY22 to FY25 PA. As a share of GSDP, it rose to 2.5% in FY2025 PA from 2.2% in FY2022, supported by expanded capex loans from the Centre. The capital expenditure as a proportion of GSDP of 10 of the 19 states improved between FY22-FY25 PA.
Capex vs. Welfare Tug-of-War
The fiscal deficits widened in 13 states, with Odisha (5.8% of GSDP) and Chhattisgarh (3.0%) seeing the sharpest increases. States like Himachal Pradesh, Kerala, Punjab, and Uttarakhand face constrained fiscal space due to high committed and subsidy burdens.
The report stated that this fiscal deficit was financed through increased borrowing ceilings, including central loans, reform-linked incentives, and carry-forward provisions for unutilised borrowing space. It also estimated the combined SGS redemptions of the sample states during FY27-FY31 to rise to Rs 20.5 lakh crore, from Rs. 13.8 lakh crore during the previous five fiscals.
The state governments have increasingly prioritised social welfare schemes, particularly cash transfers to women, even as revenue expenditures dominate budgets and fiscal deficits widen, the report stated. Over 80% of state government spending was directed towards revenue expenditures, covering salaries, pensions, interest payments, power subsidies, and various welfare programs. Revenue growth and borrowing limits play a critical role in shaping spending priorities.
Social Security Surge
In recent years, social welfare outlays have surged, including social security pensions, transfers to low-income households, and direct cash benefits to women. Notably, combined cash transfers to women by 11 states reached a staggering Rs 1.5 lakh crore in FY2026, equivalent to 0.8% of GSDP. This marks a sharp rise from Rs 12,000 crore (0.1% of GSDP) in FY2023.
The report also revealed that committed expenditures (salaries, pensions, interest) consumed nearly half of revenue spending, while power subsidies remained stable at 0.7% of GSDP, with Punjab leading at 2.4%. ICRA flags concerns over unclear pension liabilities in some states reverting to the Old Pension Scheme.
Looking ahead, ICRA cautions that upcoming 8th Central Pay Commission recommendations, potential electricity sector reforms, and the 16th Finance Commission’s borrowing guidelines could pressure state finances from FY27.