States Cross 3% Fiscal Deficit Mark After 3 Years In 2024–25: RBI Report

New Delhi, Jan 24 (KNN) States’ combined fiscal deficit rose to 3.3 per cent of GDP in 2024–25, crossing the 3 per cent mark after three years, according to Reserve Bank of India (RBI)'s report ‘State Finances: A Study of Budgets of 2025–26’.

For 2025–26, states have again budgeted a fiscal deficit of 3.3 per cent of GDP. 

The RBI said the higher deficit mainly reflects 50-year interest-free loans given by the Centre for capital investment, over and above normal borrowing limits.

Capital Spending Maintained

States continued to focus on capital expenditure, which stood at 2.7 per cent of GDP in 2023–24 and 2024–25, and is budgeted to rise to 3.2 per cent of GDP in 2025–26.

Debt Levels and Risks

States’ combined debt declined to 28.1 per cent of GDP by March 2024 from 31 per cent in March 2021, but is expected to rise to 29.2 per cent by March 2026. 

While overall debt indicators remain stable, the RBI warned of early stress, noting that several states have debt above 35 per cent of GSDP, far higher than the 20 per cent level recommended by the FRBM Review Committee.

Rising Fiscal Pressure

The RBI said higher debt, growing cash transfer schemes, future pay commission awards and climate risks will add pressure on state finances. 

States’ market borrowing rose 21 per cent year-on-year in the first half of 2025–26, with most major states planning higher borrowings. Higher state borrowing has pushed up bond yields and reduced borrowing space for the Centre and private sector.

Impact on Spending Quality

Rising interest costs are limiting productive spending. States with debt servicing above 15 per cent spent less than 2 per cent of GSDP on capital expenditure, compared with the national average of 2.7 per cent. The RBI also cautioned that welfare schemes, while important, could crowd out investment if not carefully managed.

Demographic, Climate & Transparency Challenges

Demographic changes are affecting states differently, with younger states having higher growth potential and ageing states facing revenue and spending pressures. 

Climate change was flagged as a growing risk, with the RBI recommending climate budgeting to better align fiscal planning with climate goals.

The RBI called for better transparency in state finances, including clearer reporting of subsidies and off-budget borrowings, to strengthen fiscal discipline and long-term resilience.

(KNN Bureau)