Slowdown in Revenue Collections to Challenge the Test States’ Fiscal Position: CareEdge

The fiscal position of state governments is likely to come under pressure in 2025-26 as revenue growth moderates and capital spending is expected to accelerate towards the end of the year, according to a study by CareEdge Ratings. As per the study, based on the fiscal performance of 22 states, these states have utilised about 41% of their aggregate fiscal deficit target in April-November, up from 40% in the same period last year.

Fiscal stress is particularly evident in some states. Andhra Pradesh has exhausted 95.7% of its budgeted fiscal deficit in the first eight months of the year, while Himachal Pradesh has used 72.1%, Kerala 86.2%, and Telangana 107.5%.

Revenue growth has slowed markedly. During April-November, overall revenue receipts of these states rose 7.2%, down from 12.1% a year earlier. Tax revenues increased by 9.2%, almost half the pace of the 17.4% growth recorded in the corresponding period last year. The deceleration largely reflects weaker growth in state GST collections, though strong double-digit growth in non-tax revenues has provided some cushion.

On the expenditure side, growth in revenue spending has eased, while capital expenditure rose 10.1% in April-November, partly due to a favourable base effect. Although capital spending so far remains broadly in line with historical patterns, it typically accelerates in the final months of the fiscal year. A pick-up in capital outlays amid slowing revenues could therefore pose a challenge for states in meeting their budgeted fiscal deficit targets, CareEdge Ratings said.

States have utilised 38.3% of their budgeted capital expenditure for the full year in April-November.  To support investment, the Centre has earmarked ₹1.5 trillion in the Union Budget for 2025-26 under the 50-year interest-free loans scheme for state capital investment. Of this, ₹500 billion has already been disbursed in the first half of the year, with another ₹700 billion sanctioned.

For 2025-26, states have projected an aggregate fiscal deficit of 3.3% of GSDP, down from 3.5% estimated last year. In 2024-25, however, 12 of these 22 states breached the 3% fiscal deficit-to-GSDP limit set by the Finance Commission.

Borrowing trends underscore the mounting strain. States raised ₹7.5 trillion from the market in April-December, up 17.8% from a year earlier. Borrowing is set to remain elevated in the final quarter, with states indicating plans to raise ₹5 trillion in January-March, the highest ever for a single quarter and about 9% higher than last year.