FY25 fiscal deficit of 20 major states to be lower than budgeted: Axis Bank

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The fiscal deficit of the 20 states stood at 2.9 per cent of GDP in FY24 and 2.8 per cent of GDP in FY23

3 min read Last Updated : Jun 13 2024 | 11:08 PM IST


The fiscal deficit of the 20 largest states is expected to be 2.8 per cent of gross domestic product (GDP) in FY25 compared to the budgeted 3.2 per cent of GDP, as expenditure growth is expected to moderate during the year, a report by Axis Bank said.


“Actual deficits have been 0.5-0.9 pp (percentage points) of GDP below revised estimates (RE) every year since FY18, and are often below BE as well, primarily due to slippage on expenditure,” the report said.


The fiscal deficit of the 20 states stood at 2.9 per cent of GDP in FY24 and 2.8 per cent of GDP in FY23.


The report noted that for the debt-to-GDP ratio to decline meaningfully, the states will need to bring the aggregate fiscal deficit below 2.5 per cent of GDP.


The debt problem is much more severe for Punjab, Himachal Pradesh, Rajasthan, Kerala, Bihar, and West Bengal, where the debt ratio is above 35 per cent, the Axis Bank report said.


The capital expenditure of these states is expected to see a 22 per cent compound annual growth rate over FY 23-25 supporting growth, pushing its share of spending to 16 per cent in FY25, the highest since FY09, the report said.

States including Rajasthan, Gujarat, and Odisha expect FY25 capex to be nearly twice the FY23 levels, while Karnataka, Bihar, Punjab, and Kerala are among states that have budgeted for weak growth.


The report said that while some states are fiscally challenged, including Kerala and Punjab, others have shifted priorities, or lack execution capability.


However, continued spending by states, especially on capex, should support overall economic growth, the report said.


Nearly two-thirds of incremental capex is expected to be incurred in just five states including Uttar Pradesh, Gujarat, Odisha, Andhra Pradesh, and Maharashtra, the report said.


The states’ revenue receipts for FY25 are budgeted to grow 9 per cent year-on-year over FY24 Revised Estimate (RE). Non-tax receipts are expected to fall Y-o-Y in FY25, primarily due to a decline in central grants in FY24-25, according to the research. The report noted that the central devolution has surprised positively, but grants have been lower than budgeted and are set to fall Y-o-Y in FY25 Budget Estimate (BE).


The Centre on Monday released Rs 1.4 trillion in tax devolution to states, which includes an additional instalment besides the regular release for June, to enable state governments to accelerate development and capital spending.


“Despite the planned decline in central grants in FY25, the states’ overall spending is set to grow faster than nominal GDP, funded by strong growth in own tax revenues,” the report said.


The split of revenue receipts between own sources and central transfers also varies significantly between states. For instance, the share of own taxes ranges from 71 per cent in Haryana and Maharashtra to a low of 26 per cent in Bihar and Himachal Pradesh.


The report also noted that for the debt ratio to decline meaningfully, the states will need to bring the aggregate fiscal deficit below 2.5 per cent of GDP.

First Published: Jun 13 2024 | 11:08 PM IST