Declining Revenue deficit: The states' combined revenue deficit will narrow to 0.4 per cent of GDP for FY25, a slight improvement from the 0.5 per cent recorded in FY24. Moreover, the aggregate fiscal deficit across all states is anticipated to decrease marginally to 3.1 per cent of GDP in FY25, down from the revised figure of 3.2 per cent in FY24, driven by lower-than-expected revenue receipts, primarily attributed to a decline in central government grants despite robust tax revenue growth, India rating in its latest report added.

India Ratings and Research (Ind-Ra) has upheld a neutral stance on the fiscal health of Indian states for the fiscal year 2024-25 (FY25). Director of Public Finance at Ind-Ra, Anuradha Basumatari, highlights the significance of containing revenue deficits, which offers states more fiscal manoeuvrability, particularly for capital expenditure, a trend expected to persist into FY25.

Looking ahead, Ind-Ra foresees states' own revenue collection and tax devolution from the centre to buy aggregate revenue receipts in FY25, expected to grow by 9.5 per cent year-on-year. However, budgeted central grants for FY25 are set to be 7.4 per cent lower than the FY24 revised estimates, posing a challenge to higher revenue growth.
 

Market borrowings traditionally served as the primary source of financing states' fiscal deficits, constituting nearly 80 per cent on average during FY19-FY23. Yet, a trend towards reducing reliance on net market borrowings emerged in FY22 and FY23, with states opting for interest-free loans under the centre’s "Special Assistance to States for Capital Investment" scheme. Ind-Ra projects net market borrowings of INR 7.6 trillion to fund 75 per cent of states' aggregate fiscal deficit in FY25.
Maintaining fiscal stability, Ind-Ra anticipates the debt burden to remain consistent in FY25, with the aggregate debt-to-GDP ratio forecasted to be 28.6 per cent, slightly lower than the 28.7 per cent recorded in FY24.