NEW DELHI: Capital expenditure by state governments likely grew a modest 5% year-on-year in 2025-26, as fiscally cautious states put the brakes on borrowings despite a moderation in tax revenue growth.
Aggregate capital outlay by 18 major states rose 4.7% year-on-year to Rs 6.19 lakh crore in FY26. These states — Andhra Pradesh, Assam, Bihar, Chhattisgarh, Gujarat, Haryana, Himachal Pradesh, Karnataka, Kerala, Madhya Pradesh, Odisha, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh, Uttarakhand, West Bengal and Telangana — had recorded nearly 10% growth in capex to Rs 5.9 lakh crore in FY25.
While states maintained their focus on infrastructure-led growth, the pace of capex expansion appeared uneven compared with previous years. Uttar Pradesh retained the top position with capital expenditure of Rs 1.14 lakh crore in FY26, almost unchanged from FY25. Gujarat emerged as the second-largest investor, with capital expenditure rising to Rs 78,556 crore in FY26 from Rs 65,472 crore in FY25 and Rs 56,544 crore in FY24. Karnataka’s capex increased to Rs 69,852 crore from Rs 60,538 crore in FY25, while Andhra Pradesh sharply raised capital spending to Rs 26,865 crore from Rs 19,177 crore a year earlier.
The Centre, through its Rs 1.5 lakh crore scheme of 50-year interest-free capex loans to states, played a critical role in supporting the government’s broader strategy of sustaining capex-led economic growth.
Data from state budgets showed aggregate tax revenue rising steadily to Rs 26.07 lakh crore in FY26, reflecting continued improvement over FY25 and FY24 levels. Large industrial states such as Gujarat, Karnataka and Tamil Nadu recorded sustained growth in tax revenues, while states like Bihar and Uttar Pradesh also posted strong gains, supported by expanding economic activity.
At the same time, aggregate revenue expenditure climbed sharply to Rs 33.93 lakh crore in FY26, continuing the upward trend seen in recent years. Compared with FY24 and FY25, states spent significantly more on welfare schemes, subsidies, salaries, pensions, healthcare and education. The faster growth in revenue expenditure relative to capital outlay highlighted mounting pressure from recurring commitments.
Borrowings and other liabilities rose to Rs 8.58 lakh crore in FY26, indicating that states continued to rely heavily on market loans to finance expenditure. However, the pace of borrowing moderated, with annual growth slowing to 11% in FY26 from 23% in FY25. Borrowings increased across several major states, particularly Bihar, Karnataka and Gujarat.
While states have improved revenue mobilisation since FY24, rising welfare expenditure and elevated borrowings are increasingly constraining fiscal space for sustained infrastructure expansion.
Source: The Financial Express
