by Suman Gupta
Anticipates revenue receipts to grow by 6.2% in FY26 and 7.9% in FY27 due to moderation in grants and some sensitivity to external factors
Mumbai, 20th April 2026: According to CareEdge Ratings latest ‘State Finance Report’, states are likely to continue focusing on public investment; however, capital expenditure growth is expected to moderate to ~8-10% in FY27 (reaching about 2.3%-2.4% of GSDP at Rs 8.32 – 8.46 lakh crore) as compared to estimated 17% in FY26, reflecting tighter fiscal headroom, due to rising revenue expenditure commitments and moderation in revenue growth. This moderation may be accentuated by 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.
Over FY26-FY27, state finances are expected to experience moderate revenue growth, with increasing revenue expenditure pressures. Revenue receipts are projected to grow by 6.2% in FY26 and 7.9% in FY27, trailing nominal GSDP, due to moderation in grants and some sensitivity to external factors that may weigh on overall revenue realisations. In addition, the pace of growth in central transfers is expected to slow, constrained by fiscal pressures at the Centre arising from elevated subsidy requirements amid geopolitical developments in West Asia.
CareEdge Ratings expect revenue expenditure to remain high, driven by 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.
While capex will remain a priority, its growth may moderate amid tightening fiscal headroom, leading to a modest uptick in fiscal deficits and debt.
Commenting on the outlook for state finances, Prasanna Krishnan, Associate Director, CareEdge Ratings said, “State revenue growth is expected to remain moderate through FY26 and FY27, primarily due to a tapering of grants from th Centre, with external headwinds further weighing on overall receipts in FY27. Meanwhile, revenue expenditure is likely to stay elevated, driven by (i) continued social sector spending, (ii) a higher state share under select schemes, and (iii) additional inflationary pressures from elevated commodity and fuel prices amid geopolitical developments in West Asia which may also push subsidy outgo at the state level. As a result, the revenue deficit is projected to widen from 0.8% of GSDP in FY25 to around 1.2% by FY27. Maintaining fiscal discipline will therefore remain critical as states balance welfare commitments with the need to sustain capital investment”.
The report notes that prominent states such as Uttar Pradesh, Madhya Pradesh, Gujarat, Maharashtra and Telangana have continued to prioritise capital expenditure despite moderate revenue growth, reflecting a sustained focus on infrastructure creation. States like Andhra Pradesh, Bihar and Haryana reported higher capex growth in FY25. However, with fiscal space becoming tighter due to rising revenue expenditure commitments and moderation in revenue growth, state capex growth is expected to moderate to around 8%-10% in FY27. This would translate into capex of about 2.3%–2.4% of Gross State Domestic Product (GSDP), supported by interest-free loans from the Centre. The fiscal deficit is expected to rise gradually from 3.2% of GSDP in FY25 to around 3.5% of GSDP in FY27, driven by widening revenue deficits. These deficits are also expected to exert upward pressure on debt levels, with additional downside risks stemming from evolving geopolitical developments.
Adding to this, Maulesh Desai, Director, CareEdge Ratings said, “ With fiscal space becoming tighter due to rising revenue expenditure commitments and moderation in revenue growth, state capex growth is expected to moderate to around 8%-10% in FY27 from 17% growth estimated in FY26. Therefore, meaningful traction in monetization of state infra projects and bolstering of investor confidence for Public Private Partnership (PPP) projects in states are critical for funding higher capital outlay”
CareEdge Ratings has analysed the finances of the top 15 states, which account for 89% of India’s Gross State Domestic Product (GSDP) for the financial year ending 31 March 2025 (FY25), to provide insights on aggregate state finances. These states are Andhra Pradesh, Bihar, Gujarat, Haryana, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Odisha, Punjab, Rajasthan, Tamil Nadu, Telangana, Uttar Pradesh, and West Bengal. Assumptions for these projections can vary to an extent depending upon external uncertainties, including the evolving geopolitical situation in West Asia.
