More Stories

Informist, Friday, Jan. 23, 2026

NEW DELHI – States should adopt a glide path for debt consolidation to anchor the weak fiscal metrics like high debt levels and growing interest payments, the Reserve Bank of India said Friday. "Strengthening fiscal disclosures, adopting a glide path for debt consolidation, and mainstreaming climate budgeting can together enhance states' long-term fiscal resilience," the central bank said. 

Presently, state finances are exhibiting "early signs of vulnerability", the central bank said in its report titled 'State Finances: A Study of Budgets of 2025-26'. "Elevated debt levels, growing number of cash transfer schemes, impending pay-commission awards, and heightened climate-related risks are expected to intensify the medium-term fiscal pressures," it said. 

The consolidated debt-to-GDP ratio of Indian states remains high in the post pandemic period, with a budget estimate of 29.2% for 2025-26 (Apr-Mar). Several states have a debt level above 35% of GSDP, which is much higher than the Fiscal Responsibility and Budget Management Review Committee's recommendation of 20%. The Centre has already laid a debt consolidation roadmap--to bring down its debt-to-GDP ratio to 50% plus or minus 1%, by FY31. The "highly leveraged" states may also frame a clear glide path for debt consolidation as high level of debt comes in the way of investment and growth, the central bank said.

After remaining below 3% of GDP for three successive years during FY22 to FY24, the consolidated gross fiscal deficit of states widened to 3.3% of GDP in FY25 because of slower revenue growth and higher capital expenditure. For FY26, states have budgeted gross fiscal deficit at 3.3% of GDP. "The deficit exceeding 3 per cent mainly reflects 50-year interest free loans from the Centre under Special Assistance to States for Capital Insvestment, which is over and above the normal net borrowing ceiling of the States," the RBI said. 

States are likely to meet their budgetary targets for the current year with temporary revenue loss on account of goods and services tax rate rationalisation expected to be offset by higher private consumption in the coming months, the RBI said. "Similarly, higher capital outlay is likely to be offset by moderation in revenue expenditure. On balance, States are likely to achieve their budgetary targets."

States' gross fiscal deficit remained lower at 42.8% of Budget estiamtes during Apr-Nov as against 45.5% in the corresponding period of the previous year. During Apr-Nov, states' revenue expenditure grew 6.6% as against the budgeted 19%. "If a similar trend continues, States are likely to contain their revenue expenditure below the budgeted level," the RBI said. Capital outlays are expected to gain momentum in the latter half of FY26, aided by the relaxation of conditionalities under the 50-year interest-free loan scheme for capital investment, the central bank added. 

Indian states' demographic profiles are increasingly influencing their finances, the RBI said. "The youthful States have a wider window of opportunity benefiting from expanding working age population and stronger revenue mobilisation. In contrast, the window is getting narrower for the ageing States, facing fiscal pressure arising out of shrinking tax bases and rising obligations from committed expenditure."

States neded forward-looking policies incorporating population dynamics to tackle the differential fiscal pressure and challenges, the RBI said. "Going forward, youthful states may harness their demographic dividend by strengthening human capital investments, intermediate states may balance growth priorities with early preparation for ageing, and ageing states may enhance revenue capacity alongside healthcare, pension and workforce policy reforms."  End

Reported by Shubham Rana

Edited by Akul Nishant Akhoury

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd. by NSE Data & Analytics Ltd., a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt. Ltd.

Informist Media Tel +91 (22) 6985-4000

Send comments to feedback@informistmedia.com

© Informist Media Pvt. Ltd. 2026. All rights reserved.