States Flag Shrinking Budgets, Revenue Woes Ahead of Budget

ECONOMY

Overview

State finance ministers raised alarms over diminishing fiscal space and revenue pressures at a pre-Budget consultation with Nirmala Sitharaman. They pointed to mid-year GST rate cuts as a cause for revenue losses, tightening their budgets. States are seeking compensation and adjustments to Centre-State funding structures for centrally sponsored schemes to alleviate fiscal constraints before the Union Budget 2026-27.

Shrinking Fiscal Space

States flagged critical concerns over shrinking fiscal space and mounting revenue pressures during a pre-Budget consultation with Finance Minister Nirmala Sitharaman. The discussions highlighted the significant impact of recent tax adjustments on state finances, casting a shadow over upcoming budgetary allocations.

GST Impact and Compensation Demands

Finance ministers and representatives from various states noted that mid-year Goods and Services Tax (GST) rate cuts have led to substantial revenue losses. While acknowledged as pro-people, these rationalizations have strained state budgets, limiting discretionary spending. Several states urged the Centre for compensation or sought a share in revenues from new cesses or excise duties, particularly on items like tobacco and paan masala, to offset the shortfall.

Centre-State Funding and Capital Expenditure

Concerns were also raised regarding the Centre-State funding structure for centrally sponsored schemes, with states pointing to pressures from existing cost-sharing arrangements. Demands for increased capital expenditure support from the Centre and greater clarity on long-term funding were prominent, aimed at enabling better planning and execution of development projects. The states pressed for these fiscal constraints to be a key consideration in the Union Budget 2026-27.

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