New Delhi: Eight Indian states have pegged their fiscal deficit—the gap between spending and revenue receipts met via borrowings—for the ongoing financial year at 3% or below their respective gross state domestic product (GSDP), in a sign of rising budget discipline even as overall state finances remain uneven.
These states are Gujarat, Jharkhand, Uttar Pradesh, Telangana, Odisha, Uttarakhand, Bihar and Goa, according to the Union finance ministry’s monthly economic review released on Wednesday.
The states’ budget deficit limit of 3% of GSDP is in line with the fiscal responsibility framework recommended by the Finance Commission, with the finance ministry setting this as the benchmark for state borrowing. Separately, the Centre plans to reduce its own fiscal deficit from 4.8% of GDP in FY26 to 4.4% in FY27, as part of its broader effort to gradually lower debt levels.
The Finance Commission is a Constitutional body set up every five years to recommend the between the Centre and states, as well as among states. The 16th Finance Commission (2026-31), chaired by Arvind Panagariya, has recommended keeping the states’ fiscal deficit capped at 3% of GSDP.
The economic review shows Punjab emerging as the most indebted state, with outstanding liabilities at 45.1% of GSDP, followed by Himachal Pradesh at 40.5%, Rajasthan at 36.8%, and Andhra Pradesh at 36%.
In contrast, Odisha and Gujarat remain among the least indebted states, with liabilities at 14.1% and 14.7% of GSDP, respectively, indicating stronger fiscal balance sheets, the finance ministry’s report showed.
The review also highlights that revenue-surplus states such as Jharkhand, Uttar Pradesh and Telangana have managed to keep their fiscal deficit around the 3% threshold, reflecting adherence to fiscal norms alongside positive revenue balances.
Revenue-surplus implies that states are able to meet their revenue expenditure—salaries, pensions, subsidies—through their own receipts, reducing reliance on borrowings for day-to-day spending, thereby improving fiscal sustainability.
The revenue-deficit states include Punjab, Kerala, West Bengal, Andhra Pradesh, Rajasthan and Himachal Pradesh, which face pressure from high committed expenditure such as salaries, pensions and interest payments that keep them in persistent deficit.
Economists stressed that states will also have to , as fiscal deficit is a key metric in maintaining fiscal consolidation targets.
The divergence in state finances is becoming more structural, with a small group of states maintaining revenue surpluses through stronger tax buoyancy and tighter expenditure control, while a majority continue to run persistent revenue deficits due to rising committed spending on salaries, pensions and interest payments, Abhash Kumar, assistant professor of economics at University of Delhi, said.
The overall fiscal picture, however, remains mixed. The finance ministry’s April review noted that among the 18 states analysed, about 10 have budgeted fiscal deficits at or above 3% of GSDP, underlining significant divergence in states’ fiscal positions.
This comes at a time when the Centre is from annual fiscal deficit reduction to a debt-to-GDP regime of budget discipline in order to better absorb external shocks without derailing medium-term consolidation. This requires efforts at both Union and state levels.
Uttar Pradesh is projected to be among the revenue-surplus states in FY27, with a fiscal deficit of 3% of GSDP and a revenue surplus of 1.6%, according to the finance ministry data.
The state has budgeted a capital outlay of 4.5% of GSDP, exceeding its fiscal deficit, indicating that borrowings are being directed towards asset creation rather than consumption. Its outstanding liabilities stand at 23.1% of GSDP, while interest payments account for 9.5% of revenue receipts.
Uttar Pradesh’s revenue surplus is not a one-time occurrence, as the state has remained in surplus in recent years, with only a brief dip during the pandemic period, as per the findings of a NITI Aayog report released in March 2025. The state’s budget documents show surpluses in 2022-23, 2023-24 and 2024-25, and projections continuing into 2025-26 and 2026-27.
The government of Uttar Pradesh had yet to respond to Mint‘s request for comment.
The report underscores that states unable to maintain the golden rule of zero revenue deficit are likely to face greater fiscal stress, particularly amid rising expenditure pressures and constrained fiscal space.
The finance ministry review pointed out that states simultaneously running a revenue deficit and high outstanding liabilities—for example, Punjab and Himachal Pradesh—have fewer degrees of freedom to respond to fiscal shocks. Specifically, they may have to resort to expenditure restructuring or may demand higher central transfers to meet the unforeseen shocks.