States under fiscal strain amid high welfare spend: Morgan Stanley

States, which account for more than half of public spending, are coming under fiscal pressure as revenue growth slows, welfare spending stays elevated and borrowings continue to rise, according to a Morgan Stanley report on Wednesday.

State fiscal deficits have moderated from pandemic-era highs but remain elevated at 3.2% of gross state domestic product (GSDP), above Centre's prescribed limit of 3%.

As of FY26, about 14 states continued to run fiscal deficits above 3%. Morgan Stanley estimated the aggregate state fiscal deficit would remain range-bound at 3.2% of GSDP in FY27, unchanged from the past two years, as cyclical pressures continue to weigh on revenues. However, consolidated fiscal deficit is expected to rise to 7.9% of GSDP from 7.6% in FY26.