State Borrowing Constraints

The article analyses FY2025 fiscal trends of 17 major Indian states, focusing on rising deficits, constrained borrowing space, and the Centre’s role in boosting capital expenditure through capex loans.

Fiscal Stress and Revenue Deficit Trends

• Widening Fiscal Deficit in FY2025: The combined fiscal deficit of 17 states is estimated at ?9.5 trillion (3.2% of GSDP), up from ?7.8 trillion (2.9% of GSDP) in FY2024, largely due to a near-doubling of the revenue deficit.
• Revenue Deficit Surge and Slow Revenue Growth: Revenue deficit rose to ?2.1 trillion in FY2025 PA from ?1.1 trillion in FY2024, as revenue receipts grew moderately (6.3% YoY), while revenue expenditure rose sharply by 9%.
• Implications for Productive Spending: With a higher share of fiscal deficit being consumed by revenue spending, the space for capital outlay has become constrained, making the fiscal position less growth-oriented.

Capital Expenditure and Centre's Support

• Decline in Incremental Capex Spending: Incremental capital spending of the states fell sharply to ?678 billion in FY2025 PA from ?910–1,120 billion in FY2022–2024, indicating a slowdown in infrastructure and asset-building investment.
• Centre’s Capex Loan Scheme as a Support Mechanism: The Centre disbursed ?1.5 trillion in capex loans in FY2025, up from ?1.1 trillion in FY2024; based on past trends, 17 states are estimated to have received ?1.13 trillion, funding over 40% of incremental capital expenditure.
• March-End Capex Surge and Fiscal Overruns: In March 2025 alone, states’ capex spending surged by 42% YoY to ?2.2 trillion, mainly from Uttar Pradesh, Andhra Pradesh, Maharashtra, and Karnataka, revealing a pattern of back-ended spending and fiscal stress.

Policy Recommendations and Forward Outlook

• Undershooting in Revised Estimates (RE): Despite capex pressures, actual spending in FY2025 has fallen short of the RE by ?1.1 trillion, indicating inefficiencies and delayed disbursements in public finance management.
• Concerns for FY2026 Fiscal Planning: Preliminary estimates show capex to rise to ?9.5 trillion in FY2026, implying a YoY rise of ?2.1 trillion, which is almost double the average of previous years and possibly unsustainable.
• Need for Reform in Borrowing Norms and Compensation: The Finance Commission’s recommendations on compensation cess and incentives for states to increase capital spending within fiscal deficit limits could enhance state-level public investment efficiency.

Practice Question:

“States’ fiscal consolidation efforts are increasingly constrained by limited borrowing space and revenue pressures. In this context, critically analyse the effectiveness of the Union Government’s capex loan scheme in sustaining public investment at the sub-national level.”      (250 words)