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Informist, Thursday, Feb. 6, 2025

 

By Priyasmita Dutta

 

NEW DELHI – Close on the heels of the Budget for financial year 2025-26 (Apr-Mar) presented last week by Finance Minister Nirmala Sitharaman, the stage is now set for the states to unveil their budgets. Kerala will take the lead, with state's Finance Minister K.N. Balagopal presenting the Budget for FY26 on Friday. Nine other states have announced their Budget dates so far: West Bengal on Feb. 12, Odisha on Feb. 17, Rajasthan on Feb. 19, Gujarat on Feb. 20, Maharashtra and Jharkhand on Mar. 3, Mizoram on Mar. 4, Assam on Mar. 10 and Karnataka on Mar. 14.

 

Among these ten states--Kerala, West Bengal, Rajasthan, Gujarat and Karnataka--had announced their Budget dates by January-end. Informist had  on Jan 30 reported on this with a brief introduction on these state budgets. Odisha, Maharashtra, Jharkhand, Mizoram and Assam announced their Budget dates earlier this week. 

 

Recently, a NITI Aayog report showed that Odisha's overall fiscal health was the best among 18 major states in the country during FY23. The index was computed by looking at five major sub-categories--revenue mobilisation, quality of expenditure, fiscal prudence, debt index, and debt sustainability. Interestingly, as per FY25 Budget, Odisha's public debt, projected at INR 395.15 billion this year, is at the highest since FY18. The public debt data of the Odisha government is not available for the time period before FY18. The state's public debt for FY24 was INR 324.05 billion, over six times the level in FY23.

 

But even so, the state's fiscal deficit is projected at 3% of gross state domestic product or GSDP in FY25, which is within the Centre's mandated fiscal deficit ceiling for states at 3.5%. Since the eastern state went to polls in 2024, it remains to be seen if Odisha announces any populist schemes like its neighbouring states. 

 

Populist schemes are at the heart of Budget complexities for many states in FY26. In Maharashtra's Budget as well, it would be interesting to see how the state performs fiscally considering it rolled out welfare schemes ahead of assembly elections. Deputy Chief Minister Ajit Pawar, who holds the finance portfolio, had projected Maharashtra's fiscal deficit for FY25 at 2.59% of the gross state domestic product.

 

While this is within the 3.5% fiscal deficit ceiling, the 'Mukhyamantri Majhi Ladki Bahin' scheme for women in Maharashtra will cost about INR 460 billion every year. The scheme is similar to the 'Laadli Behna' plan announced by the Madhya Pradesh government in 2023. Under it, all women aged between 21 and 60 years will get INR 1,500 per month. Besides, the FY25 Budget also provisioned three free gas cylinders per annum for eligible families, aiming to ease the financial burden on households. On top of that, Pawar had cut state tax on petrol and diesel in Mumbai, Navi Mumbai, and Thane municipal corporation areas by 1% and 3%, respectively.

 

Another key highlight in the upcoming Maharashtra Budget could be the state's details on adopting the Unified Pension Scheme which has an assured return, thereby being fiscally expensive. The Unified Pension Scheme aims to provide an assured pension, family pension, and an assured minimum pension for government employees. While employees' contribution to the Unified Pension Scheme will continue to be at 10%, the Centre's or state's contribution will be raised to 18.5% from 14%, which can be further changed by state governments. 

 

Mineral-rich state of Jharkhand has projected its fiscal deficit at 2% of GSDP for FY25, significantly lower than the 2.7% in FY24. Notably, Jharkhand has a budgeted a revenue surplus of 4% of GSDP for FY25. While from a deficit perspective, Jharkhand's finances are under control as of now, many experts said the optimistic revenue projections may constrain the state government from fulfilling the poll promises that include a monthly transfer of INR 2,500 for women heads of families, increase in monthly ration, and hike in Minimum Support Price for crops. How the state balances these fiscal dynamics will be known on Mar. 3.

 

Similar to Jharkhand, Assam also has a projection of being revenue surplus in FY25, albeit with a slight margin. The state's Budget will be crucial to see where it stands fiscally with its many ongoing welfare schemes. Since its fiscal deficit is projected at 3.5%, there are huge chances Assam will miss the target and breach the Centre's mandate. In both FY23 and FY24, Assam's fiscal deficit was higher, at 6.1% and 5.2%, respectively.

 

Mizoram is also a revenue surplus state, with its economy seen slowing in FY25 owing to slower public spending. The hilly state is dependent on the Centre, especially for revenue, with 80% of its resources coming from the Union government. The state's fiscal deficit is projected at 2.8% of GSDP in FY25, sharply lower than the 4.7% in FY24.

 

State budgets are crucial as the country's fiscal management, particularly from a rating perspective, depends on how effectively the government manages its resources and spending. The government has been advocating that India, currently rated at Baa3 by Moody's--the lowest tier of investment grade--deserves a higher rating because of its economic resilience and stable fundamentals. However, the rating agency, in its Asia-Pacific 2025 Outlook, said India needs to improve drastically on two key metrics--the size of its debt burden, and the affordability of its debt--for a sovereign rating upgrade.

 

The Budget presented on Saturday said the Centre will target to reduce debt-to-GDP ratio to 50% by March 2031, with a band of 100 basis points on either side, from 57.1% in FY25. The government said it would keep its annual fiscal deficit each year such that the debt metric declines in line with the path envisioned.

 

While Fitch said on Tuesday that clarity on the medium-term debt reduction path is a positive development and sticking to it "could improve the credit profile (of India) over time", the other two major global rating agencies are not as convinced. Moody's Ratings warned the projected improvement "may not be sufficiently material to change our broader assessment that India's fiscal strength will remain weaker than most of its Baa-rated peers". S&P Global Ratings also said that the decision to lower its debt-to-GDP ratio may not necessarily improve the country's debt burden score.  End

 

Edited by Vandana Hingorani

 

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