As India begins the second half of 2025, I personally see this as the most defining phase of India's economic and fiscal management transformation. The first five years of this decade were about recovery reviving growth post-pandemic, rebuilding confidence in the markets, and rolling out foundational reforms. Currently the innings from mid-2025 to say 2030 will determine whether India rises as a globally competitive, innovation-driven economy or falls short due to internal fiscal stress. World Bank and IMF still view that India is on a roll per their latest economic assessment report. 

Fiscal health especially how well both the Union and State governments in India  manage revenues, borrowings, and expenditures is emerging as a central pillar of sustainable growth in government circles. Taking stock of India’s current fiscal scorecard, I am sharing my observations on state-level performance and lay out what I believe are the essential pathways for the next innings.

Why Sound Fiscal Management is Mission Critical now

It is widely published that India is targeting inclusive growth while aiming to become a $5 trillion economy. This ambition rests heavily on the shoulders of the country's public finance system. The Union government in New Delhi mobilizes the bulk of revenue through GST, corporate taxes, and customs duties. However, the States bear most of the responsibility for delivering essential public services, health, education, transport, law and order, and increasingly, digital infrastructure.

This Centre and State fiscal dynamic demands balance, coordination and mutual accountability. Without a healthy fiscal system, infrastructure projects stall, welfare schemes and certain freebies dry up and investor confidence declines. In short, sound finances aren’t just a budgetary concern they are a development imperative.

A Quick Look at India’s State-Level Fiscal Performance

India’s states play an outsized role in public spending accounting for nearly +/- 60% of total government expenditure. However, their fiscal health varies greatly across pan India. As someone closely observing both macroeconomic trends and grassroots governance models, I notice a growing divide between states that follow prudent fiscal practices and those still trapped in populist spending cycles.

The Fiscal Deficit as a % of GSDP is one key indicator of how sustainable a state’s finances are. Below is a snapshot of 10 major Indian states using FY24 Budget Estimates:

Bar Chart: Fiscal Deficit as % of GSDP (FY24 Budget Estimates). See below.

What the Numbers Show

Karnataka, Maharashtra, and Gujarat emerge as fiscal role models trying hard to keeping their deficits under control while still investing in innovation and infrastructure.

Punjab and Rajasthan show elevated fiscal stress with deficits above 4.5%, driven by heavy subsidy burdens and weak revenue bases.

Tamil Nadu, Andhra Pradesh, and Uttar Pradesh remain in a mid-tier bracket but need tighter control on non-developmental spending.

This divergence matters, because investors, multinationals, and even development finance institutions are increasingly scrutinizing subnational fiscal indicators before bringing in fresh investments, committing capital or partnerships.

Challenges That States Must Overcome

1. Sticky Committed Expenditures

Pensions, salaries, and interest payments consume over half of many states’ budgets. These rigid costs leave little room for future-ready investments in green infrastructure, AI innovation, or digital governance.

2. Hidden Borrowings

Some states use public enterprises or state guarantees to take on extra debt outside the official budget. This could be an unsustainable tactic that risks triggering future financial shocks.

3. Poor Revenue Efficiencies

Several states still struggle to expand their tax base or improve compliance. Modern tools like AI-driven property tax audits, e-khata of properties or blockchain for land revenue remain underutilized. 

4. Unreformed Power Sector

Legacy issues in electricity distribution companies (discoms) continue to drain state finances to large extents Cross-subsidization, free power and outdated pricing models persist in states like Punjab and Tamil Nadu.

Karnataka state model example: Karnataka’s balanced playbook growth story - Karnataka exemplifies fiscal discipline and innovation-led development. With a deficit below 3% and the latest Indian Rupee ₹1.6 lakh crore in GST revenue, it ranks second nationally. Bengaluru hosts +/- 40% of India’s GCCs, including Goldman Sachs and SAP Labs. Backed by skilling drives, AI clusters, and new draft GCC and  semiconductor policy, Karnataka attracts global capital and fosters strong compliance with 10.5 lakh GST registrants.

Other states would do well to study this model not to copy it, but to understand how smart governance, tech-led taxation, and outcome-based budgeting can coexist.

What India Needs from 2025–2030: A Fiscal Renewal Agenda

To make the most of this second innings, the following policy directions are critical at both Union and State levels:

Modernize the FRBM Framework

The Fiscal Responsibility and Budget Management (FRBM) Act should be updated for today’s realities. It must include transparent deficit tracking, public debt ceilings, and real-time disclosures.

Use Technology for Revenue Mobilization

Digital audits, AI-led compliance, and targeted incentives should be used to boost GST efficiency and reduce tax evasion.

Transparent Borrowing Practices

States should disclose off-budget liabilities, PSU guarantees and pension obligations as part of the official fiscal statements.

Reform Intergovernmental Transfers

The Finance Commission framework should be enhanced to reward innovation, infrastructure quality, and citizen outcomes—not just historical data.

Conclusion: Scoring Steadily in the Second Half

India’s second innings of this decade has begun. The ball is in motion, and the pitch economic, technological, global geopolitical situation as VUCA and BANI is alive with opportunity. I personally see a window between 2025 and 2030 where India can consolidate its global standing, provided we build a fiscally strong foundation.

States would do well to learn to pace their spending, optimize their tax collections and invest wisely. Fiscal scorecards will no longer be back-office documents they will shape how credit agencies, rating firms, tech multinationals, and even sovereign funds engage with Indian states.

This is the time to convert potential into performance. If we do it right, play our cards well to close deals well then India's fiscal health can become its most reliable engine of long-term growth.

References

1. Reserve Bank of India – State Finances: A Study of Budgets 2023–24

2. Ministry of Finance – Union Budget Documents 2023–24

3. 15th Finance Commission Report (2021–26), Government of India

4. PRS Legislative Research – Overview of State Budgets 2024–25

5. Comptroller and Auditor General of India – State Audit Reports FY23

(The author holds a dual masters degree from Europe and the US and is an ex-international corporate banker with three decades of overseas banking experience, currently serving as a Visiting Professor in International Marketing at a university in Bengaluru, India. Views expressed are personal. He can be contacted at rameshkumarn180@gmail.com )