New Delhi, Jan. 28 -- For anyone interested in fiscal federalism, the Reserve Bank of India's (RBI) annual study of state finances is a treasure trove of information. This year's study, analysing state budgets of 2025-26, is no exception.

First, the good news. The fiscal health of state governments is improving. True, their consolidated gross fiscal deficit rose to 3.3% of India's GDP in 2024-25, after staying below 3% during the previous three years. But this increase is mainly due to 50-year interest-free loans from the Centre under its special assistance scheme for capital investment.

At the same time, the total outstanding liabilities of states declined from a peak of 31% of GDP at the end of 2020-21 to 28.1% at the end of 2023-24....