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Informist, Thursday, Jun. 11, 2026

 

NEW DELHI – The credit rating of states is "several notches" below India's sovereign rating of 'BBB' with 'stable' outlook, S&P Global Ratings said Thursday. This is due to the overall inadequacy of states' revenues to cover expenditure needs, resulting in elevated debt burden. "They collect only a third of total public revenues but spend about two-thirds of total public expenditure," the rating agency said in a report. 

 

While states' aggregate credit rating is lower than the Centre's, they have varied credit profiles – ranging from 'B' to 'BBB', with the majority at 'BB'. "Varying economic profiles, growth rates, and income levels across Indian states create diverse credit metrics, forming a primary basis for differentiation in creditworthiness," the report said.  

 

The rating agency said there is "stark economic disparity" among states, pointing towards the "big" role that central transfers play for states' revenues. "While economic growth of the Indian states as a sector is much stronger than international peers at similar income levels, the differences among the states can be stark," it said. 

 

The growth disparity is closely linked with their fiscal imbalance. States with higher capital expenditure to boost growth end up with higher fiscal deficits and lower transfers from the Centre. Conversely, states with the strongest fiscal positions tend to have GDP per capita slightly below the median, but benefit from substantial central government transfers that support their finances and lead to less borrowing.

 

With states' increasingly crucial role in driving the country's economic development, spending requirements of states will continue, which will also continue to weigh on their weak budgetary settings, S&P Global Ratings credit analyst YeeFarn Phua said. "That said, we expect credit risks to be manageable, on the back of robust economic expansion, which in turn sustains fiscal revenue growth."

 

S&P noted that the general budgetary performance of states has weakened since the pandemic, with higher trends of socioeconomic spending pushing up their overall expenditure. This expenditure is expected to remain elevated, leading to the path of fiscal consolidation to primarily depend on economic growth feeding into state revenues. S&P also observed "unevenness" in the fiscal deficit levels of states. "Notably, we see that wealthier states (in terms of GDP per capita) tend to have higher deficits," it said.

 

The Centre shares a portion of total revenues with states based on Finance Commission's recommendation. For 2026-31 (Apr-Mar), the 16th Finance Commission mandates that the Centre will vertically devolve 41% of total tax collections to states, which will then be horizontally distributed among states based on multiple metrics. Vertical devolution refers to tax revenue sharing from the central government to state governments, while horizontal devolution pertains to the distribution of states' share among individual states. 

 

Debt levels of states also vary, like their fiscal deficits. "As we observed in the case of fiscal deficits, states with higher levels of economic development carry higher debt," the rating agency said. This is also due to these states receiving less support from the central government in the form of transfers, which forces them to borrow more to fund infrastructure.

 

On a regional basis, Southern states tend to be more economically developed, the report said. "They have much higher tax-supported debt ratios, averaging 255% in FY25, compared with the national average of 155%. Their higher debt also reflects state governments there having invested more into infrastructure and socioeconomic development," it said. In all, most states' debt levels are expected to stabilise, with growth in operating revenues central to this stabilisation, S&P said. 

 

Despite these imbalances, liquidity strength across the states is seen as uniform, thanks to the Reserve Bank of India. "We anticipate Indian states will continue to have access to the market, as well as strong support from the RBI," the report said. "The RBI has stood by its commitment to ensure sufficient liquidity in the bond markets and maintaining yields at reasonable levels," it added. 

 

"Going forward, we expect the wealthier Indian states to grow faster than the rest of the country, but they would need to borrow more to invest as well," the report said. "Whereas the poorer states have less investment opportunities, they will require continual central government support for their budgetary needs," it added. "While this suggests wider disparity in developmental outcomes over time for states, credit conditions for the sector will remain broadly unchanged, in our view."  End

 

Reported by Priyasmita Dutta

Edited by Avishek Dutta

 

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