Table of Contents
- The Fiscal Squeeze States Face Post-GST
- What States Asked For in Meetings with Sitharaman
- Why GST Compensation Remains a Contentious Issue
- The Case for Enhanced Capex Support
- Political and Economic Implications for Budget 2026
- Conclusion: Can the Centre Balance Equity and Fiscal Prudence?
- Sources
The Fiscal Squeeze States Face Post-GST
Five years after the landmark rollout of the Goods and Services Tax (GST), India’s states are sounding the alarm. With the formal GST compensation mechanism ending in June 2022, many states—especially those heavily reliant on manufacturing or tourism—have struggled to bridge revenue shortfalls. Now, as Budget 2026 approaches, a united front of state leaders has emerged, demanding urgent financial relief from the Union government.
In a series of closed-door meetings with Finance Minister Nirmala Sitharaman, delegations from both BJP-ruled and opposition-led states presented a common plea: restore meaningful GST compensation and dramatically scale up capital expenditure (capex) aid to fund critical infrastructure projects . This rare consensus across party lines underscores the severity of the fiscal crunch gripping state treasuries nationwide.
What States Asked For in Meetings with Sitharaman
The state delegations put forward a two-pronged request:
- Revised GST Compensation Framework: While full 14% annual growth guarantees are off the table, states seek a new formula-based compensation for “revenue-neutral rate” (RNR) shortfalls, especially for sectors like textiles, auto, and hospitality that continue to underperform post-pandemic.
- Enhanced Capex Grants & Tied Funding: States requested a dedicated ₹2–2.5 lakh crore corpus over three years for roads, water supply, urban transit, and green energy—preferably as non-lapsable grants rather than loans to avoid debt accumulation .
Notably, even fiscally robust states like Gujarat and Karnataka joined economically stressed ones like West Bengal and Kerala in these appeals, signaling that the issue transcends individual state performance—it’s about systemic design flaws in India’s fiscal architecture.
Why GST Compensation Remains a Contentious Issue
The original GST law promised states protection against revenue losses for five years (2017–2022), funded by a 28% cess on luxury and sin goods. But collections from this cess consistently fell short, forcing the Centre to borrow ₹1.1 lakh crore in 2020–21 to meet its obligations—a move many states viewed as a breach of trust.
Since 2022, states have had to absorb all revenue volatility. According to data from the Department of Economic Affairs, 18 states reported GST revenue growth below 8% in FY25—far below inflation and expenditure needs .
“We implemented GST in good faith,” said one Southern CM. “Now we’re being asked to cut health and education budgets because the system isn’t delivering what was promised.”
The Case for Enhanced Capex Support
Beyond revenue gaps, states argue that inadequate capex funding is stalling national development goals. Key points raised include:
- Infrastructure bottlenecks: State highways, district hospitals, and urban sewage systems remain underfunded despite flagship central schemes.
- Climate resilience: Floods, heatwaves, and cyclones demand massive localized investment—yet disaster funds are often reactive, not preventive.
- Job creation: Public investment at the state level has a higher multiplier effect on employment than central mega-projects .
States propose that the Centre allocate a fixed percentage of its total capex budget directly to states via the Finance Commission route, ensuring predictable, long-term planning.
Political and Economic Implications for Budget 2026
FMsitharaman now faces a delicate balancing act. On one hand, fulfilling state demands would strain the Union’s fiscal deficit target (currently 4.9% of GDP). On the other, ignoring them risks:
- Subnational debt crises: States may resort to excessive market borrowing, raising systemic risk.
- Stalled economic recovery: Without state-level spending, rural demand and MSME growth could falter.
- Political backlash: With assembly elections due in several states by 2027, perceived neglect could fuel anti-incumbency—even against BJP allies.
Economists suggest a middle path: a temporary “GST stabilization fund” and performance-linked capex incentives, rather than open-ended commitments.
Conclusion: Can the Centre Balance Equity and Fiscal Prudence?
The push for GST compensation capex aid is more than a budgetary negotiation—it’s a test of India’s fiscal federalism. As states shoulder growing responsibilities in healthcare, education, and climate adaptation, their financial autonomy must be strengthened, not weakened.
Budget 2026 offers a pivotal opportunity to reset Centre-state financial relations. Whether Sitharaman opts for bold structural reforms or incremental tweaks will shape India’s economic trajectory for years to come.
For deeper insights into India’s fiscal challenges, explore our analysis at [INTERNAL_LINK:india-fiscal-federalism-crisis-2026].
Sources
- Times of India: State leaders ask for GST comp, capex aid in pre-Budget talks with Sitharaman
- Web Search Results: , , ,
- Department of Economic Affairs, Ministry of Finance: https://dea.gov.in/
- Report of the 15th Finance Commission, Government of India