State Budgets 101

Most public attention in India falls on the Union Budget presented in Parliament each February. Yet the services citizens deal with daily — police stations, district hospitals, government schools, state highways, irrigation canals, electricity distribution — are financed and run largely by state governments. In 2023-24 the states collectively raised 7.5% of their Gross State Domestic Product (GSDP) as their own revenue and received a further 5.5% of GSDP as assistance from the Centre, which they then spent on those services.

This guide explains how a state budget works: the constitutional machinery behind it, what GSDP is and why every fiscal rule is written as a ratio to it, how money reaches states from the Union government, the borrowing limits states operate under, and how to compare 28 very different state budgets without drawing false conclusions. GovtBudget.com holds 27 financial years for the Union Budget and data for all 28 states and 8 union territories — 37 Indian governments in total.

How state budgets differ from the Union Budget

Both budgets rest on the same constitutional design, but on different articles. The Union Budget is the Annual Financial Statement laid before Parliament under Article 112. A state budget is the Annual Financial Statement laid before the state legislature under Article 202, on the Governor's authority, and it must show separately the expenditure charged on the Consolidated Fund of the State — the Governor's emoluments, High Court judges' salaries, debt charges — and the expenditure the House actually votes on.

The procedure then runs in parallel with the Union's. A demand for a grant may be made only on the Governor's recommendation (Article 203); the voted demands are enacted through an Appropriation Bill (Article 204); gaps during the year are met by supplementary, additional or excess grants (Article 205); and where the full budget cannot be passed in time, the House approves a vote on account (Article 206). Article 199 defines a money bill for states. In the six states with a Legislative Council — Andhra Pradesh, Bihar, Karnataka, Maharashtra, Telangana and Uttar Pradesh — the Council may only recommend changes and must return a money bill within fourteen days (Article 198). Unforeseen spending is met from the Contingency Fund of the State, created by state law under Article 267(2) and placed at the Governor's disposal.

The substantive differences matter more. The Union Budget is drawn up by the Budget Division of the Department of Economic Affairs; a state budget is drawn up by the state's own finance department. States carry the heavier service burden — police, public health, agriculture and land are State List subjects, and education has been on the Concurrent List since the 42nd Amendment in 1976 — while the Centre collects most of the fastest-growing taxes. States also cannot borrow abroad: Article 293(1) confines their borrowing to within India, and Article 293(3) requires the Centre's consent while any Union loan or guarantee remains outstanding. Among the union territories, only Delhi, Puducherry and Jammu and Kashmir have legislatures of their own; the rest are financed through the Union Budget.

GSDP and why it matters for states

Gross State Domestic Product is the value of all goods and services produced within a state in a financial year — the state-level counterpart of GDP. It is estimated by each state's Directorate of Economics and Statistics using methodology and guidance issued by the National Statistical Office in the Ministry of Statistics and Programme Implementation (MoSPI). Sectors that cut across state boundaries — railways, communications, banking and insurance, and central government administration — are compiled centrally as supra-regional sectors and then allotted to states, which is one reason the state figures do not simply add up to national GDP.

GSDP matters because nearly every fiscal rule binding a state is written as a ratio to it. The standard fiscal deficit ceiling is 3% of GSDP, debt sustainability is judged as outstanding liabilities to GSDP, and revenue effort is measured as own tax revenue to GSDP — estimated at 6.8% for the states in aggregate in 2025-26, against 6.4% in 2023-24 actuals. Because the borrowing ceiling is a percentage, the GSDP a state projects determines how many rupees it may actually borrow.

GSDP also decides how much money a state receives from the Centre. The Sixteenth Finance Commission gives the largest single weight, 42.5%, to income distance: the gap between a state's per capita GSDP and the average per capita GSDP of the three large states with the highest incomes, computed over 2018-19 to 2023-24 excluding the pandemic year 2020-21. Lower per capita income means a larger share.

One caution for anyone working with the numbers. On 27 February 2026 MoSPI released a new national accounts series with base year 2022-23, replacing the 2011-12 base, and states realign their GSDP base year to match. Back series estimates are expected by December 2026, so ratios calculated on the old and new series should not be compared without checking which base each uses.

Central transfers: devolution and grants-in-aid

Money reaches states from the Union through three constitutional channels. The first is a share of central taxes, distributed on the recommendation of the Finance Commission under Article 280(3)(a). The second is grants-in-aid of the revenues of states, charged on the Consolidated Fund of India under Article 275 and governed by principles the Finance Commission lays down under Article 280(3)(b). The third is Article 282, which lets the Union make grants for any public purpose — the basis on which centrally sponsored schemes are funded.

The Sixteenth Finance Commission (Chair: Arvind Panagariya) reported for the five years 2026-27 to 2030-31, and its report was laid before Parliament on 1 February 2026. It retained the states' share of the divisible pool of central taxes at 41%, the same as the Fifteenth Commission. The divisible pool is gross central tax revenue less the cost of collection and less cesses and surcharges, so it is smaller than headline tax collections. The horizontal shares between states are set by six criteria:

Income distance	42.5%
Population (2011 Census)	17.5%
Demographic performance	10%
Area	10%
Forest cover	10%
Contribution to GDP	10%

On grants, the Commission made a significant change: it discontinued revenue deficit grants, sector-specific grants and state-specific grants, and confined its recommendation to Rs 9.47 lakh crore over five years — Rs 4.35 lakh crore for rural local bodies, Rs 3.56 lakh crore for urban local bodies and Rs 1.56 lakh crore for disaster management.

In their 2025-26 budget estimates, states expected 58% of revenue receipts from their own tax and non-tax sources, 28% from tax devolution and 14% from grants-in-aid. Dependence varies sharply: the north-eastern and Himalayan states expected 68% of revenue receipts from central assistance. Delhi, Jammu and Kashmir and Puducherry, being union territories, receive no tax devolution at all. GST compensation to states ended on 30 June 2022, five years after GST was introduced.

State fiscal deficit limits and states' FRBM Acts

Karnataka was the first state to legislate fiscal rules, enacting the Karnataka Fiscal Responsibility Act in September 2002 — before the Union's own Fiscal Responsibility and Budget Management (FRBM) Act, 2003, which came into force on 5 July 2004. Adoption became near-universal because the Twelfth Finance Commission made enactment of fiscal responsibility legislation a condition for its Debt Consolidation and Relief Facility, under which central loans to states were rescheduled over twenty years at 7.5% interest. Almost every state now has an FRBM-type Act setting a fiscal deficit ceiling, usually 3% of GSDP, and a debt path.

In practice the binding constraint is not the state law but the net borrowing ceiling the Centre sets under Article 293(3), which covers open market borrowing, loans from institutions and, in the Centre's reckoning, borrowing by state entities. The Fifteenth Finance Commission period saw considerable flexibility: the limit was raised to 5% of GSDP in 2020-21 for the pandemic, tapered to 3.5% by 2024-25, with an additional 0.5% of GSDP available between 2021-22 and 2025-26 for states undertaking power sector reforms. Loans under the Scheme for Special Assistance to States for Capital Investment, which are interest-free and repayable over fifty years, sit outside the ceiling.

For 2026-31 the Sixteenth Finance Commission has recommended an annual fiscal deficit limit of 3% of GSDP for states, and that off-budget borrowings be brought inside the reported deficit and debt. Compliance has been uneven. In 2025-26 budget estimates the states together budgeted a fiscal deficit of 3.2% of GSDP, or 2.8% excluding the fifty-year loans. Outstanding state debt stood at about 27.5% of GDP as of March 2025, against 56% for the Centre. The FRBM Review Committee chaired by N. K. Singh recommended in 2017 a debt ceiling of 20% of GDP for states and 40% for the Centre; as of 2024-25 only Gujarat, Maharashtra and Odisha had reached the 20% level, while Punjab (46%), Himachal Pradesh (44%) and Arunachal Pradesh (42%) were furthest from it.

Comparing states fairly

The first rule is to normalise. Uttar Pradesh's budget will always dwarf Sikkim's in rupees, which tells you almost nothing. Express spending and deficits as a share of GSDP or in per capita terms, and the comparison becomes meaningful. Every Indian government uses the same April-to-March financial year, so timing at least is comparable.

The second rule is to compare the same kind of number. A state budget carries three sets of figures: budget estimates for the coming year, revised estimates for the current year, and audited actuals for the year before. They diverge substantially. Between 2015-16 and 2023-24 states on average collected about 10% less revenue than they had budgeted and spent about 9% less; the shortfall in revenue receipts reached 27% in Manipur, 21% in Telangana and 20% in Andhra Pradesh, while Karnataka was the only state to meet its budgeted revenue target. Ranking states on budget estimates therefore ranks their forecasting, not their finances.

The third rule is to look past the headline deficit. Off-budget borrowings by state entities do not appear in the budget: nineteen states declared Rs 67,075 crore of them in 2021-22, falling to Rs 24,955 crore in 2024-25. Guarantees given to state enterprises are contingent liabilities — 4.4% of GSDP across 27 states as of March 2024, but 15.1% in Telangana and 10.9% in Andhra Pradesh — and loss-making distribution companies sit behind many of them.

Finally, allow for structure. Bihar and Gujarat collect almost no state excise because they prohibit alcohol; Chhattisgarh, Jharkhand and Odisha earn unusually high non-tax revenue from mining. Committed expenditure differs enormously: in 2023-24 states spent 53% of revenue receipts on salaries, pensions and interest and a further 9% on subsidies, but Punjab spent 107% of its revenue receipts on those items alone. A state with little discretionary room is not making the same choices as one with plenty.