The Finance Commission has advised states to keep their fiscal deficits within the 3% limit of Gross State Domestic Product (GSDP) from 2026–27 to 2030–31. It emphasized avoiding off-budget borrowings to ensure financial stability. The Commission also suggested that the Comptroller and Auditor General (CAG) disclose off-budget borrowings in State Finance Accounts.
The Commission noted inconsistencies in State-level Fiscal Responsibility Legislations (FRLs) and urged states to align their FRBM laws with the recommended consolidation path. It proposed broadening the definition of deficit and debt to include off-budget liabilities. Enforcing the 3% ceiling on state borrowing under Article 293(3) of the Constitution was highlighted for debt sustainability.
States were advised to cease the practice of off-budget borrowings and include all such borrowings in their budgets. The report stressed the need for a framework for regular annual reporting of off-budget borrowings, preferably as part of the budget. The Commission clarified that interest-free on-lending by the Centre to States under the Special Assistance to States for Capital Investment (SASCI) would remain outside the borrowing limit.
The report pointed out that states have increasingly turned to market borrowings to finance their deficits in recent years. State government borrowings have significantly increased, accounting for about 33% of total government securities issued in 2015–16, which rose to 43% in 2024–25. The outstanding securities have also risen compared to previous years due to higher market borrowings by states, attributed to not utilizing the National Small Savings Fund (NSSF).
According to the fiscal roadmap outlined by the Commission, the Union government aims for a fiscal deficit of 3.5% of GDP by 2031, while states are expected to maintain a 3% fiscal deficit, resulting in a combined fiscal deficit of 6.5% of GDP.
