Economics - Borrowing set to rise - Twenty state budgets – In-depth analysis by Elara Securities
Key takeaways: States Budget for Consolidation in FY26BE
* The 20 States under our review (S-20) have announced a Budget for fiscal consolidation in FY26 on the back of lower revenue expenditure and somewhat higher revenue receipts. We see a downside risk to the fiscal deficit estimates
* FY25A fiscal deficit is likely to see downside as spending remains weak on capex. The rising cash surplus by States suggests H1FY26 borrowing may remain in the slow lane although H2FY26 may rise
* The FY26BE fiscal deficit is set at ~3.2% for FY26BE vs ~3.5% in FY25RE, which is likely to see downside of 20bp according to our estimates as spending in FY25TD remains below trend
* Our assessment of allocation to women-related cash transfer schemes suggest it is being pruned to make it more dynamic, and, as such, consumption impulse is likely to be lower than initially estimated
* Just as the Central government, capital expenditure growth in States is getting normalized. Overall capital outlay expenditure growth in FY26BE for S-20 Budget is set to moderate to 16.6% in FY26BE from 19.3% in FY25RE and an average of 23.0% in FY24 & FY25
* Sectoral-wise, there is a discernible shift away from capital expenditure towards transport sectors to water supply & sanitation and housing sectors
Key takeaways: Risks to State Borrowing Are On The Upside
* While States borrowings this year have been lower by INR 2.5tn in FY25, gross borrowings in the Budget for FY26BE is 15.6% higher than FY25A
* We see upside to gross borrowing estimates for FY26 with likely undershooting of revenue estimates. States have set revenue receipts at 13.5% of GDP in Budget vs 13.4% of GDP in FY25RE, led by higher SGST and tax devolution projections
* The global tariff war and likely collateral impact to India’s economy would result in underachievement on the revenue front, both on own tax revenue and on devolution from Centre
* There is also likely to be downside on account of States estimates of GDP growth. S-20 States have projected nominal GDP growth of 11.7% YoY in FY26BE vs the Centre’s 10.1% YoY in FY26BE
* The weakening global backdrop, led by tariff-related shock and shift in the domestic monetary policy cycle, suggests rates are heading lower eventually
* We see 10-year yield of ~6.79% (GS 2034) is headed lower to ~6.2% by March 2026E from ~6.47% as on 8 April 2025 ( 1530 hrs)
The Big Picture: States Spend Well Ahead of the Trend post Covid
The Big Picture: Led mainly by surge in Capital outlay
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