States' wish lists remain unfulfilled though they will partner in growth

Like every year, even the FY26 Union Budget will be analysed more for what it has done for growth, fiscal consolidation, capex/infrastructure, agriculture/rural, employment/skill development, MSME, climate change/energy transition, and above all, measures to support lagging consumption demand.

All the announcements made in the budget help the country as a whole and, in turn, states as well, and are, therefore, important from the point of view of centre-state relations. In a three-tier system of governance in India, besides measures and direction, the allocation of resources announced in the budget has a strong bearing on the expected revenue and proposed expenditure of state and local government.

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Therefore, like citizens/corporates, even state governments put out their wish lists and expect the Union budget to fulfil them. For example, the prebudget submission of the chief minister of Karnataka to the FM Nirmala Sitaraman included a special grant to improve the infrastructure in Bengaluru, routing of funds for centrally sponsored schemes (CSS) through the state’s consolidated fund and also outlining in the budget volumes of the state-specific allocations for central schemes. 

The finance minister of Tamil Nadu, in its prebudget submission, demanded—(i) the release of more funds under the Disaster Relief Fund, (ii) the disbursal of funds under the Samagra Shiksha Scheme, allocation of more funds for the Chennai Metro Rail Project, approval to the metro rail projects for Madurai and Coimbatore among others. Kerala was expecting a ₹24,000-crore special package to overcome a financial crisis.

On the other hand, the deputy chief minister of Bihar’s pre-budget demands included—(i) an additional two million under Pradhan Mantri Awas Yojana, (ii) allocation of ₹48,320 crore for Pradhan Mantri Gram Sadak Yojana, ₹25,000 crore interest-free loan for infrastructure development, (iv) increase in Bihar’s borrowing limit until its per capita income reaches the national average.

Demands don't figure

None of these demands, though, figured in the FM Nirmala Sitaraman FY26 budget speech. One may have to look at the fine print to see whether any of these demands have been met. However, one of the demands put forth by the FM of Punjab, seeking an additional borrowing of 0.5% for power sector reforms, does find a mention in the budget speech.

No doubt, the demands put forth by the states to the FM before the presentation of Union budget each year are important from the point of view healthy centre-state relations, but the political dispensation also guides specific demands of the state governments besides the availability of fiscal space. As a result, Bihar and Andhra Pradesh received special attention in the FY25 Union budget, and Bihar has again received special attention in the FY26 Union budget.

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However, if we set aside the specific attention given to a state in the FY26 Union budget, then a number of schemes mentioned in the FY26 budget speech are expected to promote healthy cooperative federalism. These schemes are ‘Prime Minister Dhan-Dhaanya Krishi Yojana’, ‘Rural Prosperity and Resilience Programme’, ‘Comprehensive Programme for Vegetables & Fruits’, ‘Development of Top 50 Tourist Destination sites’, etc. All these schemes are to be undertaken in partnership with the states. Besides these, the centrally sponsored schemes which are implemented by state governments but are largely funded by the central government with a defined state government share, are other schemes where Centre and states cooperate.

Encouraging state capex

Like FY25, even the FY26 budget has an outlay of ₹1.5 trillion under the scheme for ‘Special Assistance to States for Capital Investment’. Continuing the scheme, no doubt encourages capital expenditure by the states, but enhancing the allocation would have been more beneficial for an economy that is facing weak consumption demand and looking for ways to stimulate it. Capex spending of state governments is generally of a short gestation period and more employment intensive. On the contrary, the Union government capex, which mostly funds large infrastructure projects though important, has a long gestation period and is less employment intensive.

A glance at the total resource transfer to the state and union territories (with legislature) in the FY26 budget shows an increase of 12.5% over FY25RE, which is more or less in line with the increase witnessed during the past few years. However, a more disaggregated view shows that while Finance Commission grants increased by just 4.4% in FY26 over FY25RE, the devolution of states share in taxes grew by 10.5% during the same period. In fact, Finance Commission grants have actually declined by 14% and 14.4%, respectively, in FY24 and FY25.

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Besides focusing on key themes laid out in the previous budget, the FY26 Union budget proposes to build partnerships with the states in rolling out some of new initiatives in the agricultural/rural domain, it is mostly silent on the pre-budget wish list of the states.

Sunil Kumar Sinha is professor of economics, Institute for Development and Communication, Chandigarh. Views expressed are personal.