The Economic Survey has urged states to exercise fiscal prudence amid concerns over rising revenue deficits and growing reliance on unconditional cash transfers, as Indian government bonds are globally indexed and foreign investors increasingly assess general government finances.

While unconditional cash transfers serve important distributional objectives by various state governments, including Bengal, the Survey said their scale and design must be balanced against the need to preserve fiscal space for growth-enhancing public investment.

While the Centre has achieved fiscal consolidation alongside record public capital expenditure, the Survey flagged emerging risks from rising revenue deficits and unconditional cash transfers in several states, which could crowd out productive spending. With Indian government bonds now included in global indices, weak fiscal discipline at the state level increasingly affects the cost of sovereign borrowing.

In the preface to the Survey, chief economic adviser V. Anantha Nageswaran said India’s 10-year government bond yield is 6.7 per cent, compared with Indonesia’s 6.3 per cent, even though both countries have the same BBB credit rating. Higher bond yields imply a higher borrowing cost for the government.

Nageswaran said states’ fiscal priorities are casting a shadow on the sovereign’s borrowing cost, as investors focus on the fiscal parameters of the general government rather than only those of the Union government.

The Survey said the combined fiscal deficit of state governments, as a proportion of GDP, has remained stable at around 2.8 per cent in the post-pandemic period. After a correction from the pandemic-induced peak of about 3.9 per cent, state deficits have edged up over the past three years to around 3.2 per cent.

Excluding the Scheme for Special Assistance to States for Capital Investment (SASCI), under which the Centre provides 50-year interest-free loans to states exclusively for capital expenditure, the fiscal deficit returns to around 2.8 per cent.

Between FY19 and FY25 provisional accounts, 18 states saw a deterioration in revenue balances. Of these, 10 slipped into revenue deficit from surplus, five saw their revenue deficits worsen and three remained in surplus despite a decline. The number of states in revenue surplus fell from 19 in FY19 to 11 in FY25, pushing the overall revenue deficit of states to 0.7 per cent of GDP from 0.1 per cent earlier.

The Survey attributed fiscal stress to slower revenue growth relative to nominal GDP growth, compounded by discretionary unconditional cash transfers. Aggregate spending on UCT programmes is estimated at ₹1.7 lakh crore in FY26.