A Limited Borrowing Space: Fiscal Deficit in FY2024
(Source: The Indian Express, Editorial Page)
Also Read: The Indian Express Editorial Analysis: 30 July 2025
Also Read: The Hindu Editorial Analysis: 30 July 2025
| Topic: GS3 (Indian Economy – Fiscal Policy, State Finances, Capital Expenditure), GS2 (Governance – Federalism, Centre-State Relations, Fiscal Devolution), GS4 (Ethics – Public Resource Allocation, Transparency) |
| Context |
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Introduction
The fiscal relationship between the Centre and states is at the heart of India’s macroeconomic landscape. This editorial evaluates budgetary trends among 17 major state governments (collectively representing about 90% of India’s GDP) for FY2025, revealing both positive effects and challenges arising from the Centre’s assistance.
Widening Fiscal Deficit and Limited Borrowing Space
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The combined fiscal deficit of 17 major states has widened to ₹9.5 trillion (3.2% of GSDP) in FY2025, up from ₹7.8 trillion (2.9% of GSDP) in FY2024.
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This widening is primarily due to a near-doubling of the revenue deficit and, to a lesser degree, an increase in capital spending.
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States face constraints in borrowing, with legal limits designed to maintain macroeconomic stability—usually capped at around 3% of GSDP.
Revenue vs. Capital Expenditure
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The higher revenue deficit in states, in contrast to the Centre, signals a greater share of their borrowings is being directed toward day-to-day expenses (salaries, subsidies) rather than productive investment.
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Capital outlay (spending on infrastructure and development) comprised 78% of the states’ fiscal deficit in FY2025 PA (Provisional Actuals), slightly lower than previous years, reflecting such pressure.
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The pace of capital expenditure growth slowed (about 10% in FY2025 PA), and a significant share of capex is “back-ended”—rushed in March each year.
Centre’s Role in Boosting State Capex
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The central government’s “special assistance for capital expenditure” (capex loan scheme) has emerged as a critical support, providing ₹1.5 trillion in FY2025, up from ₹1.1 trillion in FY2024.
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For the 17 state sample, about 40% of the increase in capex was funded via these loans, underlining the pivotal role of central support in driving state-level development initiatives.
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Despite this, the incremental rise in capex for states in FY2025 was sharply lower than the previous two years, and states often fail to fully utilize their allocated borrowing space.
Structural Challenges and Broader Policy Implications
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States grapple with “limited borrowing space,” constraining their ability to independently finance infrastructure and welfare, resulting in significant dependence on central transfers and schemes.
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A higher proportion of revenue deficit (less productive spending) is an unhealthy trend, signaling that borrowed funds are less often used for growth-enhancing outlays.
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The editorial also flags concerns about untied versus tied central grants, the “one-size-fits-all” approach of centrally sponsored schemes, and the need for more flexible and formula-based devolution.
Way Forward
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Encourage greater incentives for states to maximize capital expenditure within the borrowing limits, fostering innovation and developmental impact.
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Institutionalize a system (such as a fiscal health index or investment-friendliness index) to nudge states towards fiscal discipline and efficiency, rewarding those that prioritize productive spending.
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Revise the balance of central transfers to provide states with more autonomy and flexibility to address local developmental needs.
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Continued monitoring of fiscal shocks, such as changes in GST compensation and Pay Commission recommendations, will be critical for the medium-term fiscal outlook.
Table: Key Fiscal Indicators for States (FY2024 vs FY2025)
| Indicator | FY2024 | FY2025 (PA) | Editorial Analysis |
|---|---|---|---|
| Fiscal Deficit | ₹7.8 trillion (2.9% GSDP) | ₹9.5 trillion (3.2% GSDP) | Driven mainly by rise in revenue deficit |
| Revenue Deficit | ₹1.1 trillion (0.4% GSDP) | ₹2.1 trillion (0.7% GSDP) | A worrying rise, less room for investment |
| Capital Expenditure | ₹6.7 trillion* | ₹7.4 trillion | Growth tempered; much spending clustered in March |
| Capex Loans (Centre) | ₹1.1 trillion | ₹1.5 trillion | Centre funded >40% of incremental state capex |
| % Capex in March | ~25% | 30% | Back-ended, raises questions on efficiency |
*Approximate, based on available trends.
Key Takeaways for UPSC Aspirants:
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Understand federal fiscal dynamics: how Centre-state relations and borrowing constraints shape development spending.
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Evaluate effectiveness and limitations of central assistance for state capex.
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Analyze the fiscal discipline, dependence on central transfers, risks of revenue-focused borrowing, and implications for Indian macroeconomic stability.
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Link these trends to GS3 (Economy), GS2 (Governance), and even GS4 (Public Ethics in resource management).
Conclusion
India’s journey toward higher and more productive public investment hinges on balancing fiscal discipline with developmental needs. The central government’s capex loans have temporarily supported state capital expenditure, but structural reforms—particularly enhanced state autonomy, better fiscal management, and targeted incentives—are essential for sustainable growth.
| Practice Question: (GS-2 | 15 Marks | 250 Words) China’s construction of a mega-dam on the Brahmaputra has renewed anxieties over transboundary river governance in South Asia. Critically discuss the strategic, ecological, and diplomatic implications for India. Suggest a comprehensive strategy for India as a lower riparian state. |
