Winning Bizness Economic Desk

Mumbai. The momentum of India’s economy is shifting toward states that were once classified as low-income or emerging, with Bihar and Uttar Pradesh showing some of the strongest improvements in recent years. A new HSBC assessment notes that this shift marks a clear departure from the pre-pandemic period, when growth was concentrated in traditionally richer states. The current convergence, the report says, is powered mainly by rising state incomes rather than falling population levels. Yet, the study also cautions that rising expenditure on cash-transfer and other populist schemes may undermine this momentum if not managed carefully.

Public capex push shaping new growth landscape

States have significantly raised their public capital expenditure, setting the stage for higher long-term economic gains. Assam, Uttar Pradesh, Rajasthan and Bihar are among those that improved their growth outcomes while sharply expanding their capex commitments. Strong capex not only strengthens infrastructure but also signals policy stability, which in turn attracts more private investment. Better revenue flows after the pandemic — helped by higher central transfers — have further enabled these states to put more funds into long-term assets.

Midway through this trend, key drivers include:

• Stronger state-level financial support after the pandemic
• Focus on roads, connectivity, irrigation and digital capability
• Private investors responding positively to improved infrastructure
• Better fiscal planning in several emerging states
• Rising incomes encouraging higher capital spending
• Greater confidence in state-led development push

Emerging states now posting highest growth numbers

Between FY23 and FY25, Bihar grew at 10.3 percent and Uttar Pradesh at 9.0 percent in real GSDP terms, both outperforming India’s average of 7.8 percent. Bihar recorded a structural shift in FY25, with the industry sector’s share in GVA rising to 23.2 percent, surpassing agriculture’s 22.4 percent for the first time. Uttar Pradesh, meanwhile, witnessed exceptional rise in exports of electronics, IT services and other high-tech goods between FY17 and FY25, strengthening its position as a major contributor to national output.

Fiscal pressures now threaten sustained capex cycle

Despite slowing revenue growth, states did not cut capex in FY25. They instead absorbed higher fiscal deficits to maintain momentum. However, the situation has started tightening. The Centre’s tax revenue is expanding more slowly due to lower tax rates and weaker nominal GDP, which means states may receive a smaller share from the 41 percent divisible pool. This could reduce their fiscal flexibility over the medium term.

Slowing revenue growth and rising welfare costs raise risks

Higher spending on cash-transfer schemes is pushing up committed expenditure and stretching state budgets. If these schemes continue expanding without matching revenue gains, fiscal deficits may widen further.

Key risks flagged by the report include:

• Slower central tax growth reducing state transfers
• Expanding welfare programmes increasing recurring costs
• Lower nominal GDP growth weakening state revenues
• High deficits limiting ability to maintain asset-creating capex

Possible disruption to the convergence path ahead

The report warns that if state revenues weaken further or populist programmes continue expanding, capital expenditure will likely be the first casualty. Such a pullback could interrupt the convergence trend that emerging states have initiated. Ensuring steady income growth and disciplined fiscal priorities, the report notes, will be essential for sustaining India’s new pattern of broad-based growth.