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Informist, Thursday, Jul. 23, 2026

 

NEW DELHI – States have budgeted 16.9% of their total expenditure for capital expenditure in 2026-27 (Apr-Mar), lower than the Centre's allocation of 22.8% of total expenditure, according to a Bank of Baroda report based on budget documents of 23 states. States' capital expenditure trails the Centre's due to higher committed expenditure, elevated revenue expenditure, and limited fiscal space, the report said.  

 

"First, states have less flexibility on deficit; and hence, after spending on other revenue items, balance the budgets with the capex amount," Madan Sabnavis, chief economist of Bank of Baroda, said. "Second, states have closer contact with individuals and hence tend to spend more on welfare," it said. 

 

The divergence in capital spending among the various states also reflects differences in the size of their budgets. Capital expenditure as a share of total expenditure is highest in Gujarat at 30.3% and lowest in Himachal at 6.2%. Four other states – Tripura, Meghalaya, Odisha and Jammu and Kashmir – have budgeted a higher share of capital expenditure than the Centre, while Uttar Pradesh is just below the Centre's level. "This is indicative of how states are pushing forth with capex wherever possible given the space provided in the budget," the report said. 

 

Sabnavis said states with higher-than-average committed expenditures tend to have a lower capital expenditure-to-total expenditure ratio. The exceptions are Madhya Pradesh and Uttarakhand, which have maintained their capex thrust notwithstanding the committed expenditure. The total expenditure of 23 states in FY27 is INR 64 trillion, higher than the Centre's INR 53.5 trillion. "This gives the importance of states when it comes not just to revenue raising but also expenditure, as there is a closer connectivity to the people."

 

The lowest fiscal deficit projection for FY27 is 2% of GSDP for Gujarat and the highest is 4.6% of GSDP for Jammu and Kashmir. But for all states put together, the fiscal deficit is 3.1% of GDP in FY27, which can be compared with the Centre's deficit of 4.3% of GDP. "Of the 22 states for which this ratio is available, 10 have targeted a number which is in the range of the FRBM (Fiscal Responsibility and Budget Management) ideal ratio of 3%," the report said. "The fiscal deficit ratios are under control and being monitored regularly," according to the report. 

 

To fund the high spending while ensuring fiscal consolidation, states' main sources of revenue are goods and services tax, sales tax and excise duty. Data shows 23 states collect 21.1% of their total tax revenue from sales tax and excise duty, while the Centre collects just 8.8%. The main taxable items for states are petroleum goods and sin goods, with the value added tax on petroleum products varying across states. Similarly, states impose excise duties on sin goods like liquor and tobacco.

 

"The share of these taxes tends to be higher in the southern states where consumption is higher, and the levies on petroleum products are higher," the report said. Gujarat and Bihar have strict prohibition laws, which have in turn kept the ratio of excise duty to tax revenue lower at 15.4% and 4.8%, respectively. Mizoram too has a prohibition, which has resulted in low revenue collections.

 

According to the report, 23 states collect 32.1% of their total revenues from GST while the Centre collects 23.1%. These two are not really comparable as the Centre has a wider basket of sources of taxation, with GST being only one of them, thereby widening the denominator, the report said. 

 

Another important source of tax revenue for some states is stamp and registration fees, the report said. The average is 8.4% for all 23 states put together, with higher collections seen in states that are seeing a rising trend in the real estate business, the report said.   End

 

Reported by Priyasmita Dutta

Edited by Saji George Titus

 

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