Analyzing India’s Public Finances: Central, State, and Combined Data

When we talk about India’s economy, understanding public finances is like reading a health report of the nation. Just as a doctor examines different vital signs to assess your wellbeing, economists analyze central government finances, state government finances, and their combined picture to understand the country’s fiscal health. These numbers tell us whether the government is managing its money wisely, where it’s getting its revenue from, and how it’s spending on our collective future.

Understanding central government finances through deficit indicators 🔗

The central government’s financial health is primarily measured through various deficit indicators, with the Gross Fiscal Deficit being the most talked-about number. Think of fiscal deficit as the gap between what the government spends and what it earns-excluding what it borrows. For FY 2024-25, India successfully achieved its fiscal deficit target of 4.8% of GDP, bringing it down from 5.6% in the previous year. This downward trend signals improving fiscal discipline.

The Union Budget documents reveal that the fiscal deficit for 2024-25 stood at Rs 15.69 lakh crore in revised estimates, slightly better than the budgeted Rs 16.13 lakh crore. But fiscal deficit is just one piece of the puzzle. Revenue deficit, which measures the gap between revenue receipts and revenue expenditure, stood at 1.9% of GDP in 2024-25. This indicates how much the government needs to borrow just to meet its day-to-day expenses-not a healthy sign if it’s too high.

Another crucial indicator is the Primary Deficit, calculated by subtracting interest payments from the fiscal deficit. It shows whether the government is borrowing to pay old debts or to fund new projects. For 2024-25, the primary deficit was pegged at 1.3% of GDP, suggesting that a significant portion of borrowing goes toward servicing existing debt rather than creating new assets.

Where does the money come from? 🔗

Central government receipts flow from two main channels: tax revenue and non-tax revenue. Tax revenue includes direct taxes like income tax and corporate tax, as well as indirect taxes such as GST and customs duties. Net tax receipts for the first eight months of 2024-25 reached Rs 14.43 lakh crore, representing 56% of the annual target. This robust collection provides the government with the funds needed for infrastructure projects and welfare schemes.

Non-tax revenue comes from sources like dividends from public sector enterprises, interest on loans given to states, spectrum auction proceeds, and fees for government services. In 2024-25, non-tax revenue was estimated at Rs 5.45 lakh crore, showing a significant 36% increase over the previous year. Capital receipts, excluding borrowings, include disinvestment proceeds and loan recoveries, though these have been less predictable in recent years.

How the deficit gets financed 🔗

When expenditure exceeds receipts, the government must bridge the gap through borrowing. Market borrowings through government securities remain the primary source, accounting for Rs 11.62 lakh crore in 2024-25. The government also borrows against small savings schemes, issues treasury bills for short-term needs, and occasionally takes external debt. This borrowing pattern matters because it determines interest obligations for future years and affects the availability of credit for the private sector.

The fiscal realities of state governments 🔗

State governments play an even more critical role in public service delivery than the Centre, handling most healthcare, education, and local infrastructure responsibilities. According to the RBI’s study on state finances, the combined gross fiscal deficit of all states was contained at 2.8% of GDP in 2022-23, below budget estimates for the second consecutive year. This fiscal discipline came primarily through reduced revenue deficits while maintaining healthy capital spending.

However, the picture varies dramatically across states. As of March 2024, 19 states had outstanding liabilities exceeding 30% of their Gross State Domestic Product, higher than recommended limits. States like Himachal Pradesh, Sikkim, and Andhra Pradesh face particularly high fiscal deficits, while several northeastern states maintain healthier balances due to substantial central transfers.

State revenue patterns and challenges 🔗

States earn revenue through their own taxes (like sales tax on petroleum, stamp duty, excise on alcohol), their share in central taxes devolved by the Finance Commission, and grants from the Centre. Since the implementation of GST in 2017, State GST has become the largest source of own tax revenue for states, accounting for about 42% of their tax collections. However, revenue realization under GST has been lower than the pre-GST regime, creating challenges for states that previously relied heavily on taxes now subsumed under GST.

The end of GST compensation in June 2022 marked a significant shift. This compensation mechanism had guaranteed states a 14% annual growth rate in revenue. States like Punjab, Puducherry, and Goa, which had greater reliance on this compensation, now face revenue pressures. This explains why many states are pushing for broader GST coverage to include petroleum products and exploring other revenue augmentation measures.

Understanding state liabilities and risks 🔗

State government liabilities include not just direct borrowings but also contingent liabilities in the form of guarantees to state public sector enterprises, particularly power distribution companies. These guarantees rose significantly from Rs 4.2 lakh crore in 2015 to Rs 10.4 lakh crore in 2023, representing about 3.9% of GDP. If these guarantees are invoked due to defaults by loss-making enterprises, states would face sudden cash outflows, worsening their fiscal position.

The total outstanding liabilities of all states combined reached approximately Rs 84 lakh crore by 2024, having grown at an average annual rate of 12%. This debt burden restricts states’ ability to invest in development projects and increases the share of revenue spent on debt servicing rather than public services. Some states like Punjab allocate over 90% of their subsidy expenditure to power subsidies, crowding out other developmental needs.

The combined picture: Centre and states together 🔗

Looking at the combined finances of the Centre and states provides a macro view of India’s overall fiscal position. The combined debt-to-GDP ratio had peaked at about 90% during the COVID-19 year of 2020-21 but has since been declining through fiscal consolidation efforts. By 2023-24, this ratio improved to around 83%, though it remains higher than the FRBM Act’s recommended target of 60% for the general government.

Fiscal consolidation as a shared responsibility 🔗

Fiscal consolidation refers to the gradual reduction of deficits and debt levels through prudent financial management. Both the Centre and states have adopted this path, guided by the Fiscal Responsibility and Budget Management Act of 2003 and subsequent Finance Commission recommendations. The Centre aims to bring its fiscal deficit down to 4.4% of GDP by 2025-26, while states are expected to maintain their combined fiscal deficit at around 3% of their Gross State Domestic Product.

This consolidation is crucial for several reasons. High government borrowing pre-empts resources that could otherwise go to private sector investment. In India, household financial savings amount to about 8% of GDP, and when supplemented by capital inflows of around 2.5% of GDP, total investible resources reach about 10.5% of GDP. When the combined fiscal deficit of governments consumes around 9% of GDP, little remains for private enterprise and public sector units.

Market borrowings and ownership patterns 🔗

The combined market borrowings of the Centre and states have been substantial, with the Centre alone raising Rs 11.62 lakh crore through government securities in 2024-25. These securities are owned by various entities: the Reserve Bank of India holds a portion, commercial banks are major investors, insurance companies hold significant amounts, and foreign portfolio investors have limited exposure. This ownership pattern affects monetary policy transmission and financial sector stability.

State governments increasingly rely on State Development Loans issued through auctions conducted by the RBI. The yields on these loans showed an upward bias during 2022-23, influenced by the RBI’s policy rate hikes and global bond market trends. Higher borrowing costs put additional pressure on state finances, as debt servicing consumes a growing share of revenue receipts.

Quality of expenditure matters 🔗

Beyond deficit numbers, the quality of government expenditure determines whether borrowing translates into future growth. Developmental expenditure-spending on education, healthcare, infrastructure, and economic services-creates assets and capabilities that drive long-term prosperity. Revenue expenditure on salaries, pensions, interest payments, and subsidies, while necessary, doesn’t create lasting assets.

Capital expenditure by both Centre and states has been rising, reaching 2.8% of GDP for states in 2023-24 and budgeted at 3.1% for 2024-25. The Centre’s capital expenditure reached Rs 10.52 lakh crore in 2024-25. This focus on capital formation is encouraging, as infrastructure investment creates multiplier effects throughout the economy. However, many states face pressure to allocate more resources to subsidies, particularly for electricity, farm loan waivers, and direct cash transfers, which can crowd out productive investment.

Emerging challenges and the path forward 🔗

Several emerging trends pose challenges to public finances. The rollback of pension reforms by some states, returning to the old defined benefit system from the contributory National Pension System, could significantly increase future committed expenditure. The continuing losses of state-owned power distribution companies create contingent liabilities that may eventually require state government bailouts. The proliferation of centrally sponsored schemes, while aimed at national priorities, sometimes limits state flexibility in addressing their specific needs.

The International Monetary Fund has emphasized the importance of structural reforms to drive long-term productivity alongside fiscal consolidation. Improving tax buoyancy, rationalizing subsidies, strengthening tax administration, and ensuring timely implementation of capital projects are critical. States need to improve their own source revenues, particularly from underutilized sources like property taxes, while the Centre must balance supporting states with maintaining overall fiscal discipline.

Transparency in reporting off-budget borrowings, contingent liabilities, and guarantees remains crucial for accurate fiscal assessment. Uniform reporting standards across states would enhance comparability and accountability. The Finance Commission’s recommendations for fiscal consolidation roadmaps, tied grants for reforms, and monitoring mechanisms provide a framework, but implementation determines success.

What do you think? Should states have more borrowing flexibility to fund infrastructure, or does strict fiscal discipline matter more? How can governments balance immediate welfare needs with long-term fiscal sustainability?

References

1. https://www.drishtiias.com/daily-updates/daily-news-analysis/india-achieves-fiscal-deficit-target-of-4-8-for-fy25
2. https://prsindia.org/files/budget/State_of_State_Finances-2024-25.pdf
3. https://prsindia.org/files/policy/policy_analytical_reports/State%20of%20State%20Finances%202022-23.pdf
4. https://factly.in/data-total-outstanding-liabilities-of-state-governments-over-%E2%82%B9-84-lakh-crores-or-29-of-gsdp-as-of-2024/
5. https://www.ey.com/en_in/insights/tax/india-tax-insights/fiscal-consolidation-in-india-charting-a-credible-glide-path