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Informist, Tuesday, Apr. 21, 2026

 

NEW DELHI – The inflationary concern over energy prices due to the ongoing West Asia war may put strain on states' fiscal deficit in 2026-27 (Apr-Mar). According to economists, the pressure is expected to place states in a tighter fiscal spot in FY27, with widening revenue deficit and slower revenue expenditure growth.

 

States' fiscal deficit is expected around 3.5% of gross state domestic product in FY27, 20 basis points higher than the 3.3% projected in FY26, according to CareEdge Ratings. "This moderation may be accentuated by the geopolitical crisis in West Asia, which could exert pressure on both revenues and expenditure through their impact on energy prices, thereby constraining the pace of capital outlay," the rating agency said in a report based on data of 15 states, which account for 89% of India's gross state domestic product for FY25.

 

Economists at IDFC First Bank, in the meantime, see states' fiscal deficit to remain flat at 3.6% of GSDP in FY27 "at best" given the downside risk to revenue collections during the year. Economists at the bank, who projected FY26 fiscal deficit at 3.6% of GSDP based on 17 states, said the projection was higher than the budget estimate of 3.1% of GSDP due to a shortfall in revenues. Even the revenue expenditure is tracking lower than budget estimates, the economists said in a report.

 

"The weakness in tax collections in FY26 was driven by a slowdown in nominal GDP growth and goods and services tax cuts," economists at IDFC FIRST Bank said. Beyond the shortfall in taxes, lower grants from the Centre will also put pressure on states' fiscal deficit.

 

Economists at the rating agency projected states' revenue expenditure to rise 8% in FY26 and 11% in FY27. The revenue expenditure is likely to remain high mainly due to "sustained growth in social sector spending and welfare-oriented measures alongside potential pressures from higher energy and commodity costs, leading to a gradual widening of revenue deficits and limiting fiscal flexibility," they said. Social sector expenditure is estimated to grow at around 11% annually, the report added. 

 

Considering this, CareEdge forecasts states' revenue deficit to widen to 0.9% of GSDP in FY26 and 1.2% of GSDP in FY27. The revenue receipts are projected to grow by 6.2% in FY26 and 7.9% in FY27. "This growth is lower than the pace of nominal economic expansion and reflects moderation in states' own tax revenue buoyancy due to softer consumption trends and volatility in fuel-linked taxes," economists at the rating agency said. Additionally, central transfers to states are likely to slow down due to fiscal pressure at the Centre stemming from higher subsidy requirements amid the war in West Asia.

 

Given this moderation in revenues, states are expected to crowd out capital spending as they prioritise essential and committed expenditures amid a more uncertain macroeconomic environment, economists at CareEdge said. States' capital expenditure growth will moderate to around 8-10% in FY27, about 2.3-2.4% of GSDP at INR 8.32 trillion-8.46 trillion, they said. "Maintaining fiscal discipline will therefore remain critical as states balance welfare commitments with the need to sustain capital investment," the report said. End

 

Reported by Shweta

Edited by Akul Nishant Akhoury

 

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