Context: In 2023-24, Indian states collectively ran a revenue deficit, spending 62% of revenue receipts on salaries, pensions, interest, and subsidies. PRS report analyses state finances across income, expenditure, transfers, debt and inter-state inequality. Thus, flagging structural fiscal stress even as capital spending is being propped up by central schemes.
Parameters on Which the Report is Based:
| Parameter | Basis Used in the Report |
|---|---|
| Scope | • All States plus Union Territories of Delhi, Jammu & Kashmir, and Puducherry |
| Primary basis | • State Budget Documents (2025-26 Budget Estimates); CAG Finance Accounts; RBI data |
| Reference period | • Long-term trends from 2014-15 onward; focus on 2023-24 Actuals and 2025-26 Budget Estimates |
| Institutional benchmarks used | • 15th Finance Commission (2020), FRBM Review Committee, 2017 (Chair: N.K. Singh); RBI's 'State Finances: A Study of Budgets 2024-25'; Standing Committee on Finance Report, August 2025 |
Key Terms
| Term | Meaning |
|---|---|
| Revenue Deficit | Gap where revenue expenditure exceeds revenue receipts which implies borrowing to fund recurring (non-asset-creating) expenses |
| Fiscal Deficit | Gap between total expenditure and total receipts (excluding borrowings) which equals the amount a government must borrow in that year |
| Committed Expenditure | Non-reducible recurring spending on salaries, pensions, and interest payments |
| SASCI | Scheme for Special Assistance to States for Capital Investment. Centre gives states 50-year interest-free loans for capital spending |
| Untied vs Tied Transfers | Untied transfers (e.g., tax devolution) can be spent per state discretion & tied transfers (e.g., Centrally Sponsored Schemes) are earmarked for specific purposes |
| Off-Budget Borrowings | Borrowings raised by state-owned entities to fund government expenditure, kept outside the state budget and legislative sanction |
| AT&C / ACS-ARR Gap | ACS-ARR is the gap between per-unit cost of electricity supply and per-unit revenue realised |
| UCT Scheme | Unconditional Cash Transfer are direct monthly cash benefit to women beneficiaries, largely without conditions on use |
Key Findings
i. Fiscal squeeze from committed spending: States spent 53% of revenue receipts on salaries, pensions & interest, and 9% on subsidies in 2023-24. Punjab alone spent 107% of its revenue receipts on these items.
ii. GST underperformance persists: Combined Centre-State GST revenue is 5.5% of GDP (2023-24) versus 6.5% pre-GST (2015-16) and the 15th FC’s 7% medium-term target; states such as Punjab, Chhattisgarh, Karnataka, MP, and Odisha saw the sharpest declines.
iii. Declining fiscal autonomy: The share of untied transfers to states fell from 68% (14th FC period) to 64% (15th FC period), reducing states’ spending flexibility.
iv. Capital spending increasingly Centre-dependent: States funded 19% of capital outlay via SASCI loans in 2024-25 (up from 2.9% in 2020-21), even as states’ own capital effort stayed flat but the unconditional share of SASCI loans fell from 80% (2022-23) to 38% (2025-26).
v. Widening inter-state inequality: Richer states (Haryana, Karnataka, Tamil Nadu, Gujarat) raise more per capita revenue and spend more per capita on development, creating a self-reinforcing growth gap versus poorer states (Bihar, Uttar Pradesh, Jharkhand).
vi. Rapid rise of cash transfer schemes: States providing UCT schemes for women rose from 2 (2022-23) to 12 (2025-26), costing ₹1,68,040 crore. 6 of the 12 implementing states have a revenue deficit, and the schemes measurably worsen states’ revenue balances.
vii. Persistently high debt burden: Outstanding debt of states stood at 27.5% of GDP (March 2025) well above the FRBM Review Committee’s 20% benchmark met by only Gujarat, Maharashtra, and Odisha. Interest payments grew faster (10% CAGR) than revenue receipts (9.2% CAGR).
Unconditional Cash Transfer: Top States by Outlay (2025-26 BE)
| State | Scheme Name | Benefit (₹/month) | Budget 2025-26 (₹ crore) |
|---|---|---|---|
| Maharashtra | Mukhyamantri Majhi Ladki Bahin Yojana | 1,500 | 36,000 |
| Karnataka | Gruha Lakshmi Yojana | 2,000 | 28,608 |
| West Bengal | Lakshmir Bhandar Scheme | 1,000–1,200 | 26,700 |
| Madhya Pradesh | Mukhyamantri Ladli Behna Yojana | 1,250 | 18,669 |
| Tamil Nadu | Magalir Urimai Thogai | 1,000 | 13,807 |
| Jharkhand | CM Maiyan Samman Yojana | 2,500 | 13,363 |
Challenges Identified
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- Structural rigidity of expenditure: Salaries, pensions, and interest cannot be reduced in the short-to-medium term, crowding out capital and development spending set to worsen with the 8th Central Pay Commission likely from January 2026.
- Post-GST revenue autonomy loss: States surrendered independent tax-rate-setting power to the GST Council (Centre holds one-third weightage), while collections remain below pre-GST levels.
- Weakening fiscal federalism: Falling share of untied transfers and a shrinking unconditional component of SASCI loans reduce states’ ability to set their own spending priorities.
- Subsidy and cash-transfer burden: Rising unconditional cash transfers and power subsidies (53% of total subsidy spend) add fiscal stress without necessarily building productive capacity.
- Debt overhang: 5% of GDP outstanding debt against a 20% target, compounded by rising interest costs and, in several states, undisclosed off-budget borrowings and DISCOM-related contingent liabilities.
- Growing regional inequality: Lower per-capita-income states have limited fiscal space, risking a widening — not narrowing — of regional development gaps.
- Weak budget credibility: States raised 10% less revenue and spent 10% less than budgeted (2015-16 to 2023-24 average), with capital outlay underspending (20%) far exceeding revenue underspending (7%).
Recommendations
i. Rationalise subsidies and cash transfers: RBI (2024) recommends states rationalise subsidy and cash-transfer expenditure to free up space for productive/capital spending.
ii. Sustain fiscal discipline to meet debt targets: Standing Committee on Finance (2025) calls for bringing state debt-to-GDP down to the recommended 20% level to ensure macroeconomic stability.
iii. Eliminate off-budget borrowings: The 15th Finance Commission recommends states identify and eliminate off-budget borrowings in a time-bound manner to improve fiscal transparency.
iv. Diversify and strengthen own-revenue: RBI suggests revising user charges (power/water), enhancing mining royalties, and monetising public assets (e.g., via InvITs) to boost non-tax revenue.
v. Improve DISCOM operational efficiency: RBI recommends minimising distribution losses, improving metering, ensuring timely tariff revisions, and reducing reliance on subsidies to curb contingent fiscal risk.
vi. Restore untied transfer share: In line with the 14th FC’s original intent, a higher share of untied transfers would restore states’ spending flexibility and align resources with local priorities.
Conclusion:
The report paints a picture of Indian states under sustained fiscal pressure. However, with debt still above recommended levels and interest costs outpacing revenue growth, report underscores the urgency of expenditure rationalisation, revenue diversification and disciplined adherence to FRBM targets if states are to sustainably fund growth and narrow regional inequality.
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