India's state finances face headwinds in FY26, says CareEdge report

Indian states’ fiscal health is under strain in fiscal year 2025–26 (FY26), with moderating revenue growth colliding with a likely acceleration in capital expenditure (capex), casting doubts on their ability to meet budgeted deficit targets, according to a new CareEdge analysis of 22 states that represent 94 per cent of the country’s gross domestic product (GDP).

 

“While capex trends so far this year remain broadly in line with historical patterns, capital spending typically accelerates in the closing months of the fiscal year. A likely increase in capex amid a slowdown in revenues could pose a challenge for the states in meeting their budgeted aggregate fiscal deficit target of 3.3 per cent of GSDP for FY26,” the report cautioned.

 

The report suggests that growth in aggregate revenue receipts slowed to 7.2 per cent year-on-year during April–November 2025, from 12.1 per cent in the year-ago period, as tax revenues decelerated to 9.2 per cent from 17.4 per cent during the corresponding period.

 

State goods and services tax (GST) collections, the largest tax component, expanded by 5.2 per cent, far below the nearly 14 per cent seen in the corresponding months of the previous two years, owing to a Rs 23,000 crore one-time negative Integrated Goods and Services Tax (IGST) settlement in April 2025 and rate rationalisation from late September that hit third-quarter net growth.

 

“The slower growth in state GST collections has weighed on states’ overall revenue performance. However, the impact has been partly offset by the healthy performance in excise duties, stamp duty, registration and other taxes and duties. The tax collections in the year so far have met close to 60 per cent of the full-year budgeted amount, in line with the performance seen in the corresponding period of last year,” the report noted.

 

Offsetting this somewhat, non-tax revenues jumped 13.5 per cent over the same period (April–November) after contracting last year, propelled by mining income in resource-rich states such as Chhattisgarh, Jharkhand and Odisha. The analysis points to other taxes showing resilience, with excise duties up 10.3 per cent, stamps and registration fees up 9.5 per cent, and miscellaneous duties up 12.5 per cent.

 

Expenditure patterns have been reported to reflect caution on revenue spending but optimism on capex. Revenue outgo rose 6.9 per cent during the first eight months of the fiscal year (April–November), utilising 54.3 per cent of the budget (slightly below 55.8 per cent last year), driven down by growth in salaries and wages (2.4 per cent) and subsidies (14.5 per cent).

 

“However, some states, such as Maharashtra, Madhya Pradesh, Uttar Pradesh and Kerala, recorded high growth in revenue expenditure in eight months of FY26, on the back of previous years’ high growth,” the report added.

 

Aggregate capex of the 22 states surged 10.1 per cent after a 5.9 per cent contraction amid last year’s elections, using 38.3 per cent of the budget, in line with past trends that see a fourth-quarter spike.

 

Overall, the report notes that in eight months of FY26, the states have utilised 38.3 per cent of the budgeted capex amount for the full fiscal year. “The capex in the fiscal year so far has been broadly in line with historical trends. However, state capex typically accelerates in the closing months of the fiscal year. Capex trends warrant close attention, given states’ historical underutilisation of budgeted capex,” it added.

 

The rating agency suggests that given this background, the states have responded by aggressively tapping market borrowings, having borrowed Rs 7.5 trillion in the first nine months of FY26 (April–December).