The Other Budget

Every February, the whole country talks about one budget, the Union Budget. Then it’s over. And 28 other budgets are quietly presented across India’s states. Almost nobody looks.

That’s a mistake. The Union Budget shapes the country. But your state budget shapes your daily life. Your roads. Your government hospital. Your child’s school. Your city bus. Most of that is paid for by your state, not by Delhi.

So how does a state get its money? Three ways.

One, its own taxes, like State GST, stamp duty, and excise on liquor. Two, a share of the taxes Delhi collects. And three, when that isn’t enough… it borrows.

That last one, spending more than you earn, is called a deficit. Every government runs one. It isn’t automatically bad. Borrowing to build a metro that lasts 40 years is smart. Borrowing just to pay this month’s free-electricity bill is risky. The real question is always: how much, on what, and can they pay it back?

States are being asked to spend more than ever, on building, welfare, ageing populations and disaster recovery, at the exact moment Delhi’s easy money is drying up. So they borrow more. And the states least able to cope get squeezed the hardest.

Let’s build that up, one step at a time.

WHAT’S INSIDE
1 The scoreboard looks calm. That’s the trap.
2 Delhi used to gift money. Now it lends it.
3 Allowance shrinks, out comes the credit card.
4 Free stuff is easy to start, impossible to stop.
5 One country, secretly split into three.

Add up every state’s deficit. It comes to about 3.3% of the economy. Delhi’s limit is 3.5%. So 3.3 is under the line. Looks perfectly fine. But it only looks fine because of a crutch. Since Covid, Delhi has been giving states a very unusual loan: 50 years to repay, and zero interest. A loan like that barely feels like debt. And it doesn’t count against the borrowing limit. So a state can spend more and still look like it’s following the rules.

Take that special loan away, and the real gap is bigger than it looks. So the calm headline is a bit of an illusion.

Delhi’s money to states comes in two parts. One is a fixed share of central taxes, kept steady at 41%. That part is fine.

The other is grants, top-ups for states that need help. This is being cut. The latest rules scrapped three whole types of grants, nearly half the old pool. That money now goes straight to city and village councils instead, for things like water and sanitation.

Good for local councils. Bad for states. Grants used to be flexible cash a state could spend on any problem. Now it skips them. The states that leaned on grants the most, Kerala, Punjab, Himachal, the North-East, feel it worst.

So grants are down. What does a state do? It borrows more. States now cover about three-quarters of their deficit by selling bonds (basically IOUs). And strangely, lenders charge a weak state almost the same as a strong one, because everyone assumes Delhi will quietly rescue any state in trouble.

That assumption, that Delhi always catches a falling state, has never once been tested.

Meanwhile, spending keeps climbing, because states are doing two costly things at once.

One is good: building roads, ports and power lines, things that pay off for decades. The other is harder to control: freebies. Free power, loan waivers, cash straight into bank accounts. You can even hear it in budget speeches, “subsidy” is being replaced by “income support.”

A lot of this help is genuinely needed. But a cash handout, once it starts, is almost impossible to stop. There’s always a large group depending on it. So it becomes a permanent bill, year after year, on top of everything else.

This is the most important part, and the one nobody talks about. India is not one country here. It’s really three.

Now follow the money. For every rupees 100 its economy makes, a young state’s government collects about rupees 19–20. An ageing state collects barely rupees 10. A huge gap.

You’d think ageing states just tax badly. They don’t. Look only at the taxes each state raises itself, and they’re nearly the same, about rupees 6.50–7 per rupees 100. The whole gap comes from Delhi’s top-up. And Delhi deliberately gives more to the younger, poorer states.

So here’s the trap for an ageing state like Kerala. It’s squeezed from both sides at once. Its workforce is shrinking, so growth slows and there’s less to tax. And because it’s relatively well-off, Delhi’s help is thin. All while its pension and healthcare bills climb. It isn’t that Kerala spends carelessly. The system itself squeezes an ageing state.

And there’s a painful twist for young states too. Their young workers are their big advantage, but only if they’re educated, and only if they stay. Many don’t. They move to richer, older states for jobs, and spend their money there. Worse, the share of young states’ budgets going to education is falling. So a young state can lose its workers, and an ageing state gains them, the opposite of what the raw numbers suggest.

For now, it all holds, but only because Delhi keeps lending cheap and the economy keeps growing fast enough to outrun the debt. Neither is guaranteed forever.

What’s in it for you

So why should you care? Because the state behind your money, your job, your business, your property, even your bonds, is its own little economy. Its own debt. Its own age problem. Its own room to spend.

Two states can look the same on the surface and be very different underneath. A young state with empty coffers and an ageing state with rising bills are not the same risk, even if they share a flag and a rupee.

That’s the whole point of reading the budget nobody reads. The headline says everything’s fine. The story underneath tells you where the real risk, and the real opportunity, actually is.