Introduction
This report analyzes the financial trajectory of all Indian states and select Union Territories (Delhi, Jammu and Kashmir, and Puducherry) against the backdrop of post-pandemic recovery and structural tax reforms. The analysis evaluates state performance against recommendations from the 15th Finance Commission and Fiscal Responsibility and Budget Management (FRBM) frameworks.
National Landscape
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- Revenue Receipt Composition: States raise approximately 58% of their revenue from own-tax and non-tax sources, while receiving 28% from tax devolution and 14% from grants-in-aid.
- GST Stagnation: Aggregate revenue from taxes subsumed under GST declined from 6.5% of GDP in 2015-16 to 5.5% in 2023-24, remaining below the 15th FC’s 7% target.
- Transfers from Centre: Total transfers are estimated at 7.2% of GDP for 2025-26. However, untied transfers (offering states spending flexibility) have declined from 68% to 64% during the 15th FC period.
Core Findings
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- Fiscal Deficits and Debt: Aggregate outstanding debt for states stood at 27.5% of GDP as of March 2025, significantly higher than the recommended 20% ceiling. Only Gujarat, Maharashtra, and Odisha met the 20% target.
- Income Inequality: Higher-income states generate more per capita revenue, enabling greater investment in development, which widens the income gap with poorer states.
- Expenditure Rigidity: States spent 62% of revenue receipts on committed items (interest, salaries, pensions) and subsidies in 2023-24. Punjab’s committed spending actually exceeded its total revenue receipts at 107%.
- Budget Credibility: On average, states raised 10% less revenue and spent 9% less than their original budget estimates between 2015-16 and 2023-24.
Systemic Challenges
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- Rising Subsidy Burden: States spent 9% of revenue receipts on subsidies in 2023-24, with power subsidies accounting for 53% of that total.
- Cash Transfer Pressures: The number of states providing unconditional cash transfers (UCT) to women rose to 12 in 2025-26, costing an estimated Rs 1,68,040 crore (0.5% of GDP). Six of these states estimate a revenue deficit.
- Contingent Liabilities: Outstanding guarantees extended by states (primarily to loss-making DISCOMs) amounted to 4.4% of GSDP by March 2024.
- Interest Payment Growth: Interest obligations grew at an annual rate of 10% (2016-17 to 2024-25), outpacing revenue receipt growth of 9.2%.
Triple-Tiered Recommendations
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- University/Institute (State Department) Level: Focus on improving operational efficiency in DISCOMs by minimizing technical (AT&C) losses and ensuring timely tariff revisions.
- State Level: Rationalize subsidy spending and UCT schemes to free up space for productive capital expenditure. Augment non-tax revenue through asset monetization (InvITs) and revised user charges for services.
- Central Level: The 15th FC recommends streamlining GST rate structures to achieve the 7% GST-to-GDP target. Continued support via SASCI is vital, but the decline in its unconditional component needs addressing to maintain state autonomy.
Way Forward
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- Fiscal Consolidation: States must adhere to a debt reduction path accompanied by a decline in the interest-to-revenue receipts ratio.
- Transparency: Eliminate off-budget borrowings and ensure consistent reporting to enhance fiscal discipline.
- Revenue Augmentation: Leverage mining-rich states’ potential through mineral block operationalization and auctioning critical minerals.
- Capital Outlay Prioritization: Shift from borrowing for recurring revenue expenses toward asset creation, which currently stands at only 2.7% of GSDP.
Conclusion
The report concludes that persistent revenue deficits and high committed spending are “crowding out” essential development expenditure. To achieve long-term economic stability and reduce cross-state inequality, states must balance popular welfare schemes with disciplined fiscal management.
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