3 min readFeb 20, 2026 07:38 AM IST
First published on: Feb 20, 2026 at 06:10 AM IST
After the Union Budget, the focus will now shift to states’ budgets to get a holistic picture of general government finances. These budgets will outline states’ revenue growth projections and spending priorities, which tend to vary. But as we await their presentation, the trends of the ongoing financial year offer interesting insights into state finances. The analysis of key indicators of 18 major states (which comprise 89 per cent of India’s GDP) for the first nine months of 2025-26 suggests that actual revenues and expenditures will be lower than budgeted levels. But, encouragingly, states’ capital spending is expected to report a healthy expansion.
In the first nine months, the 18 states’ combined revenues grew by 7.7 per cent, way below the 22 per cent growth indicated in the budget numbers. State GST collections grew a mere 3.3 per cent. Several factors including lower GST rates, income tax rationalisation, easing interest rates, and an above-normal monsoon should have supported consumption. These seem to have been offset by the recovery of the excess Integrated GST apportioned previously to the states. The 11-13 per cent growth of excise duty and stamps and registrations has buoyed overall revenues. But states will miss their budget targets by a sizeable margin.
Alongside this, the transfer of funds from the Union government will also trail the amount pegged in the Budget Estimates this year. The Centre has devolved Rs 13.9 trillion to all states as against a budgeted Rs 14.2 trillion. This revision is, however, modest. In a similar vein, grants by the Centre to states will also fall short of Budget targets. During the first nine months of the year, grants declined by around 18 per cent, in sharp contrast to the robust 60 per cent growth projected by states.
The modest growth of their revenues seems to have nudged the states to slow down their revenue expenditure, with spending growing at 7 per cent, sharply below the 19 per cent indicated in their budgets. On the other hand, capital spending, after being lacklustre in the first half of this fiscal year, expanded by a healthy 25.7 per cent in the third quarter. While that has pushed up the overall growth for the nine months to 12.4 per cent, it is still well below the 30 per cent expansion indicated in the budgets.
In recent years, the 50-year interest-free capex loan provided by the Centre to states has provided an impetus to their spending on capital projects. Out of the Rs 1.5 trillion allocated under capex loans for this year, it had transferred Rs 1.0 trillion by end-January 2025. Accordingly, to meet the target of Rs 1.5 trillion, Rs 466 billion now remains to be disbursed to the states in February–March.
If the capital spending momentum recorded by the states in the third quarter continues, 20-25 per cent growth in such spending in the fourth quarter appears reasonable. This would imply that state capex over the entire year would probably grow by a healthy 16-18 per cent. This would support the country’s economic momentum, more so in the ongoing quarter, amid a possible contraction in the Union government’s own capex.
The writer is chief economist, head-Research & Outreach, ICRA
