Delhi collects the loud headlines, but states decide whether growth shows up as better roads, steadier power, cleaner permits and more reliable public services for households and firms.
The question behind the headline
Fiscal federalism in India is easiest to understand not in a Budget speech but at a construction site. A highway approach road waits for state land acquisition. A factory clears central customs but still needs state power, water and local permits. A family benefits from an income-tax rebate announced in Delhi, then loses the gain to school fees, bus fares and electricity tariffs set much closer to home. That is why the Centre-versus-state question is not constitutional theatre. It is a live economic question.
The Centre still writes the macro script
The Union government still dominates the macro script because it controls corporation tax, personal income tax, customs, most borrowing space and the fiscal narrative that bond markets price. In Budget Estimates for 2025-26, the Centre put its own capital expenditure at ₹11.21 lakh crore and effective capital expenditure at ₹15.48 lakh crore once grants for capital creation are included. The same budget projected total resources transferred to states at ₹25.01 lakh crore, including ₹14.22 lakh crore of tax devolution. That number is the clue. Delhi’s power lies not only in what it spends itself, but in how much of the national fiscal bloodstream it channels outward.
Why the states still run much of the lived economy
States, however, run a much larger share of the economy that citizens and businesses actually experience. The Sixteenth Finance Commission records that states bear proportionately larger expenditure responsibilities in health, education, agriculture, drinking water, sanitation, welfare and law-and-order. That is not a ceremonial list. It covers human capital, farm incentives, urban services, policing, land administration and much of the compliance friction that determines whether households feel relief and whether firms can scale. Delhi can announce a growth strategy. States decide how fast it lands.
Fiscal federalism in India after GST
GST changed this balance in a subtle way. It created a common indirect-tax architecture and gave states a seat at the table through the GST Council, but it also took away many unilateral rate-setting levers they once used through VAT and related levies. The Sixteenth Finance Commission records that several states argued they had lost fiscal autonomy under GST because they could no longer adjust sales tax and VAT rates at will. Yet GST also became central to state finances: across 2018-19 to 2023-24, SGST accounted for 41.2 per cent of states’ own tax revenue, the largest single component. So GST did not make states weaker in revenue significance; it made them more interdependent.
Transfers are not a side note
That interdependence is now visible in the composition of transfers. The Union Budget for 2025-26 budgeted ₹1.33 lakh crore of Finance Commission grants and ₹1.5 lakh crore of special assistance loans for state capital expenditure, on top of tax devolution. The latest Budget at a Glance for 2026-27 pushes tax devolution to ₹15.26 lakh crore and keeps total resources transferred to states at ₹25.44 lakh crore. This is why the old picture of a fiscally dominant Centre and fiscally dependent states needs updating. The Centre still raises the bigger, deeper pool of taxes. But it increasingly finances growth through states, not around them.
State capex is where the balance has shifted
The sharpest evidence lies in capital expenditure. RBI’s State Finances report shows states budgeting capital expenditure at 3.2 per cent of GDP in 2025-26, or ₹11.4 lakh crore. That is slightly above the Centre’s own 2025-26 budgeted capex of ₹11.21 lakh crore. The macro consequence is large. Industrial corridors, urban transport, irrigation networks, power distribution upgrades and logistics links are often state-domain projects or state-enabled projects. Competitive federalism in India therefore no longer turns mainly on tax concessions. It turns on execution capacity: who can clear land, fund distribution networks, manage utilities, crowd in private investment and finish projects on time.
Yet even this state capex surge carries Delhi’s fingerprints
But the state capex story is not a pure assertion of provincial strength. It has been underwritten by Delhi. The Economic Survey notes that allocations under the Scheme for Special Assistance to States for Capital Investment jumped from about ₹12,000 crore in 2020-21 to ₹1.5 lakh crore in 2025-26, with cumulative uptake reaching ₹4,49,845 crore till 4 January 2026. The same chapter makes the harder point: excluding SASCI-linked spending, states’ capital outlay would have fallen from 2.11 per cent of GDP in FY22 to 1.92 per cent in FY25 provisional accounts, even though headline capital outlay rose. In plain English, states have become more macro-relevant, but part of that relevance is financed by the Centre’s balance sheet.
Where the system now pinches
This arrangement carries stress points. RBI says states’ consolidated gross fiscal deficit widened to 3.3 per cent of GDP in 2024-25 and is budgeted at the same level in 2025-26. Outstanding liabilities are budgeted at 29.2 per cent of GDP by end-March 2026. Revenue receipts have been squeezed by the decline in grants from the Centre, especially as GST compensation and post-devolution revenue-deficit grants faded. So the federal bargain is under pressure: states are expected to spend more on services and infrastructure, but they do so with less unilateral tax discretion and with debt levels that still need watching.
What this means for households, tax professionals and companies
For the middle class, the lesson is blunt. Macroeconomic comfort in Delhi does not guarantee cheaper schooling, faster urban transport, lower electricity cross-subsidy, or smoother property registration. Those are often state-budget questions. For tax professionals, the practical implication is that advisory work can no longer stop at the Union Budget or the Income-tax Act. GST administration, stamp duty efficiency, mining levies, power subsidies, excise policy and state incentive design increasingly shape real tax incidence and business structure. For the corporate sector, India is still one national market in aspiration, but it remains a federation in operating reality. A company choosing between Tamil Nadu, Gujarat, Uttar Pradesh or Telangana is making an economic decision as much as a location decision.
So who really runs India’s economy?
The honest answer is that the Centre sets the macro frame, but the states increasingly determine the quality of growth. Delhi controls the big levers of redistribution, borrowing and national tax design. The states control much of the spending that turns growth into productivity, service delivery and investment confidence. In a crisis, the Centre matters more because it can raise and redirect resources at scale. In normal times, states matter more than the headlines suggest because they govern the transmission mechanism. India’s economy is not run by Delhi or the states alone. It is run by a federal bargain—and right now, that bargain is tilting toward the states as implementers, even when the money still begins at the Centre.
Sources & Data Points
- Union Budget 2025-26, Budget at a Glance: Used for 2025-26 Union capital expenditure, effective capital expenditure, tax devolution, Finance Commission grants, special assistance loans to states, and total resources transferred to states. Open source
- Union Budget 2026-27, Budget at a Glance: Used for the latest official transfer architecture, including 2026-27 tax devolution, Finance Commission grants, total transfers to states, and the note on GST compensation cess phase-out. Open source
- Reserve Bank of India, State Finances: A Study of Budgets of 2025-26: Used for consolidated state fiscal deficit, capital expenditure, social sector expenditure, debt and guarantees, grants slowdown, and the role of Centre-funded interest-free loans. Open source
- Economic Survey 2025-26, Chapter 2: Fiscal Developments: Used for GST collections in April-December 2025, Centre-to-state transfer trends, and the detailed analysis of the SASCI capex-support scheme. Open source
- Report of the Sixteenth Finance Commission, Volume 1: Used for the retained 41 per cent devolution framework, the states’ expenditure responsibilities, the GST autonomy debate, and the Commission’s broader framing of Union-State fiscal roles. Open source
- Highlights of Union Budget 2025-26, Press Information Bureau: Used as a supporting official source for the ₹1.5 lakh crore outlay of 50-year interest-free loans to states for capital expenditure and reform-linked incentives. Open source
