Revenue Deficit Of States May Exceed By Rs 70k cr in FY26: ICRA

Chennai: Combined revenue deficit of 15 state governments in FY26 might exceed the Budget estimate of Rs 1.6 lakh crore by Rs 70,000 crore and touch Rs 2.3 lakh crore. The fiscal deficit too is likely to move up to Rs. 10.5 lakh crore or 3.3 per cent of GSDP in FY26 from the Budget estimate of Rs 10.3 lakh crore, finds ICRA.

The states, including Andhra Pradesh, Chhattisgarh, Gujarat, Haryana, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Odisha, Punjab, Rajasthan, Tamil Nadu, Telangana, Uttar Pradesh and West Bengal, will see their combined revenue deficit exceeding by Rs 70,000 crore due to a slower growth in revenues.

The combined own revenues of the states may expand by 9.7 per cent in FY26, lower than the 21 per cent growth forecasted in BE estimates. While lower GST, income tax and interest rates, as well as above normal monsoon are expected to support consumption and boost the tax revenues, global factors pose concerns regarding business prospects of certain sectors, which can potentially dent consumption.

A modest miss in the tax devolution to the states in this fiscal cannot be ruled out. After two consecutive years of double-digit contraction in grants, a 12.4 per cent expansion in this revenue stream will lag the ambitious 66 per cent expansion expected by the states in FY26 BE.

Further, the combined capital spending of the states will be 18 per cent higher to Rs. 8.2 lakh crore in FY26, though lower than the Rs. 9.1 lakh crore anticipated in the BE. The capital spending by Gujarat, Haryana, Karnataka, Maharashtra and Tamil Nadu may stay nearly in line with or higher than the levels projected in their BE.

These forecasts imply a modest slippage in the combined fiscal deficit of the 15 states to Rs. 10.5 trillion or 3.3 per cent of GSDP in FY26 from Rs. 10.3 trillion in the BE. The fiscal deficit would be funded by a mix of market borrowings and funds under the Scheme for Special Assistance to States for Capital Investments.

Overall, the combined leverage of the states is expected to inch up to 30.3 per cent of GSDP in FY26 from 29.3 per cent of GSDP in FY25.