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The FY27 fiscal deficit for 19 largest states (95% of GDP) is budgeted at 3.1% of GDP. Adjusted for interest-free loans for capex from the Centre, the ratio is 2.6%, taking general government budgeted deficit ratio below 7%. As usual, states’ receipts and spending targets seem aggressive. The 2Y CAGR of 15% on receipts seems aggressive (FY27 GDP growth estimated at 12%, vs. 10% by the centre), esp. given the 7% growth in 11MFY26, and the drop in Finance Commission grants. 2Y CAGR of spending at 14% also appears aggressive, especially the 20% estimated for capex (actual capex has been 13% lower than RE since FY22). Both should net off, and while actual deficits tend to be well below RE and often below BE too, we expect FY27 state deficits to be around 2.6% of GDP. Gross borrowings are expected to grow 5%, after 19% growth in FY26.
FY27 deficit budgeted at 3.1%, actual deficit might not be lower in FY27
Total of 19 state budgets (95% of GDP) shows FY27 budgeted gross fiscal ratio (GFD) at 3.1% of GSDP, well below FY26RE 3.6%, and FY25A 3.2%. Excluding SASCI loans (offered by the centre for capex, interest-free) GFD ratio would be 2.6%. Actual deficits tend to be well below RE, and usually BE too, but are rarely below 2.6%, implying FY27 could be closer to BE. This would bring general government deficit below 7% of GDP. States have assumed 12% GDP growth (vs. 10% in the central budget), and high revenue growth (SGST: 15% vs 6% in the central budget, these may be aggressive.
Strong growth in own tax revenues assumed; stress might persist in FY27
Given significant divergence in Actuals vs. RE, YoY assumptions for receipts and spending in FY27BE are usually misleading. We therefore focus on 2Y CAGR (FY25A to FY27BE): the 15% assumed for receipts (+13% in FY27 over +17% in FY26RE) seems aggressive even on 12% nominal GDP growth: revenue receipts grew only 7% in 11MFY26. Nominal GDP numbers have been revised lower in the new series, and FY26 Actuals for the centre saw gross taxes 1.3% below RE. Further, Finance Commission grants are down 16% YoY (revenue deficit grants discontinued): most states would not have known that.
Spending targets high too: 2Y capex CAGR 20% YoY helped by SASCI
2Y CAGR (FY25-27) on expenditure is 14%: 9% YoY in FY27 appears reasonable, but on a high base of 19% in FY26RE. 2Y CAGR on capex is 20%, pushing its share of spending to 16% (the highest since FY09). However, actual capex has been 13% below RE since FY22. Incremental spending growth for both capex and revex is concentrated in the top 5 states (60%). Some newly elected governments may spend on welfare schemes to fulfil electoral promises. States’ gross borrowings rose 19% in FY26, widening the yield spread over G-secs. However, these are budgeted to grow 5% in FY27.
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