States must fix their own economies, address deeper structural cracks

A recent report by Crisil showed that India’s 18 largest states, which together account for over 90 per cent of the country’s gross state domestic product (GSDP), are projected to see a revenue growth rate of 7-9 per cent in 2025-26, up from 6.6 per cent in 2024-25. Aggregate revenues are expected to touch ₹40 trillion, driven largely by steady goods and services tax (GST) collection, robust growth in excise on liquor, and improved central transfers. Petroleum tax collection, however, continues to lag with subdued 2 per cent growth.

 

Clearly, this is a reassuring sign of stability in state finances against a challenging global and domestic economic backdrop, creating fiscal space for increasing capital outlay. However, it also highlights deeper structural issues. Revenue growth remains below the decadal average of 10 per cent, and most states continue to rely heavily on transfers from the Union government. From 2015-16 to 2024-25, central transfers accounted for 23 to 30 per cent of state revenues, relative to 20-24 per cent in the 2000s and early 2010s. At the same time, central grants comprised 65-70 per cent of the non-tax revenue of states in the last decade, compared to 55-65 per cent earlier. This long-term trend underscores both the increasing role of the Centre and the narrowing scope of states to independently boost their finances. A report by PRS Legislative Research showed that, in 2024-25, states were estimated to have raised 58 per cent of their revenue receipts from own tax and non-tax sources, while 42 per cent was estimated to have come from the devolution of central taxes and grants from the Centre.

 

Overall, as the Reserve Bank of India (RBI) Report on State Finances 2023-24 had noted, the aggregate debt-to-GDP ratio of states stood at 28.5 per cent, exceeding the 20 per cent limit set by the Fiscal Responsibility and Budget Management Review Committee. The data suggests that of all states and Union Territories, 12 had their debt-to-GSDP ratio higher than 35 per cent in 2023-24, while around 24 had their debt above 20 per cent. Nevertheless, states have done better than the Centre, barring a few outliers. Several states have improved transparency in budgeting, enhanced efficiency in social-sector delivery, and prioritised capital expenditure. In fact, most states have demonstrated a fair degree of fiscal prudence. They have by and large adhered to the Fiscal Responsibility and Budget Management norms, keeping their fiscal deficits around 3 per cent of GSDP. The consolidated gross fiscal deficit of states fell from an average of 4.3 per cent of GDP during the period 1998-99 to 2003-04 to 2.7 per cent of GDP during 2004-05 to 2023-24.

 

However, there is a need for strengthening state-government finances. Reforming GST compliance is an urgent priority. States must also expand digital revenue tracking and plug leakages in property tax and user charges. Concurrently, the Centre must ensure timely and predictable transfers, particularly through Finance Commission-recommended grants, which help address horizontal imbalances. There is also considerable friction between states and the Centre on the latter’s use of cesses and surcharges, which are not shared with states. The increased dependence on cesses and surcharges distorts the fiscal balance between states and the Union, which should be avoided.