Bihar’s fiscal fragility deepens as own-revenue continues to remain low
With own-revenue at 25.8 pc of total revenue receipts in FY06-FY26, state finances are trapped in cycle of dependence on central transfers, debt, and low growth
One of the biggest hurdles holding Bihar back from breaking free of poverty and underdevelopment is its chronic lack of financial resources.
For nearly two decades — from FY06 to FY24 — the state has remained heavily dependent on central support, with an average of 74 per cent of its total revenue coming from the Centre’s tax devolution and grants. This overwhelming reliance underscores just how limited Bihar’s own fiscal capacity is to drive growth and development.
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In its March 2025 report titled Macro and Fiscal Landscape of the State of Bihar, the NITI Aayog said: “Bihar collects less in own tax and non-tax revenues compared to a median state. Transfers from the Centre are significantly above the level of a median state and constitute around 75 per cent of the total revenue receipts.”
Worrying symptoms of poor economic health
♦ 74% of revenue comes from Central transfers
♦ Own-tax share just 31.6% of total tax receipts
♦ No excise income due to liquor ban
♦ SGST forms 58% of state’s own tax collection
♦ Public debt stands at 39.6% of GSDP
Too little own revenue
PRS Legislative Research’s State of State Finances report of November 2024 (on states’ budget for FY25) too had flagged this concern, listing Bihar with Jammu & Kashmir and north-eastern states for such high dependence on central transfers (tax and grants).
A closer look at Bihar’s revenue resources reveals that its own-tax collection, which forms 90 per cent of its own-revenue in the five fiscals of FY22-FY26 (Budget Estimate, or BE), not counting the central transfers (tax and grants), averages 25.8 per cent of its total tax receipts in the 21 fiscals of FY06-FY26 (BE).
This is in sharp contrast to the averages for all states. For all states, the average of own-tax as a percentage of total tax revenue is 64.6 per cent during FY12-FY25 (BE); for Bihar, it is just the reverse, at 31.6 per cent during this period.
Heavy reliance on State GST
Further, its own tax comes mainly from the State GST (SGST), accounting for 58 per cent in FY25 (BE) – which is far higher than 44 per cent for all states budgeted for FY25.
This shows that Bihar is disproportionately dependent on consumption (generating SGST) than other states, which have higher tax collections from industrial and other development activities, pointing to their more productive economic activities.
Even then, Bihar didn’t really benefit from the adoption of GST in 2017. A 2025 study by the Finance Ministry think tank National Institute of Public Finance and Policy (NIPFP) showed that Bihar couldn’t generate as much in indirect taxes as it used to before the GST replaced those indirect taxes in 2017, like all other major states, with the sole exception of Maharashtra. This was without counting the GST compensation, which ended in June 2022 (only arrears were paid thereafter).
Tax sources
Bihar’s indirect taxes (subsumed in the GST in 2017) accounted for 3.4 per cent of its nominal GSDP in FY16 – the base year for such calculations. During the subsequent eight fiscals of FY17-FY24, its SGST averaged 3 per cent – below the 3.4 per cent level in FY16.
The other main own-tax source for all states for FY25 (BE), as per the PRS report mentioned earlier, was: sales tax/VAT (21%), excise duty (14%), stamp duty (12%) and revenue from other sources such as taxes on vehicles and electricity (10%).
One significant element that is missing for Bihar is excise on alcohol for human consumption.
Bihar collects zero excise, as against an average of 14 per cent for all states, because it banned liquor sale and consumption in 2016. Bihar Chief Minister Nitish Kumar had promised to do so if voted back to power in the run-up to the 2015 state elections. Banning liquor was good politics, but it has deprived the state of a major source of tax revenue.
Liquor ban economics
Before Bihar banned liquor, its excise collections from it averaged 15.5 per cent of its own-tax collections during the five fiscals of FY11-FY15 (Bihar’s Economic Survey of 2015-16).
This is far higher than 14 per cent for all states in FY25 (BE). Gujarat is the only other major state that prohibits liquor; Mizoram and Nagaland are the smaller states that do so and report zero excise.
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In the recent past, states like Andhra Pradesh and Haryana banned liquor but were forced to reverse it within months to generate funds for development activities.
If Bihar were to lift the ban, it would significantly boost its own financial resources.
Apart from losing revenue, Bihar is also diverting financial and human resources to implement the ban, pay compensation for hooch tragedies that keep striking and clogging local courts. There is no account of how much money it generates as penalties from smugglers and their illicit clients.
Poor fiscal management
Bihar’s expenditure budgets show that committed expenditure (revenue expenditure) on salary, pension, interest payment and principal repayment is very high, averaging 37 per cent of the total budget spending in the seven fiscals of FY20-FY26 (BE).
This isn’t exceptional though. The PRS’s study of state budgets for FY25 shows that most states budgeted spending over 80 per cent on revenue expenditure, which has a significantly lower multiplier effect on growth than capital expenditure.
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As for sectoral allocations for FY25 (BE), Bihar’s education budget was among the highest; its spending on rural development and housing was also higher than the national average. But in other key areas like health, social welfare, agriculture, irrigation, urban development, energy, roads and bridges and water supply, its allocations were below the national averages.
As for capital expenditure, Bihar’s 19 per cent of the total budget expenditure for FY25 was above the average of all states, which was 16 per cent.
But budget estimates can mislead.
Credibility gap in budget estimates
The PRS study of FY25 (BE) specifically marks Bihar (along with Assam) for lack of credibility in its budget estimates.
It shows, on the revenue side, states raised 11 per cent less revenue than budgeted between FY16 and FY23, which was much higher at 18 per cent in Bihar’s case. On the expenditure side, states spent 10 per cent less than budgeted during the same period, which was far lower at 15 per cent in Bihar’s case.
Similar discrepancies were noted even in the revised estimates between FY18 and FY23.
Bihar is again flagged by the PRS study for greater than average divergence, along with Assam. It found Bihar’s revised revenue receipts and capital outlay were overstated by 16 per cent and 40 per cent, respectively.
Mounting debts, widening deficits
Bihar’s performance in other fiscal parameters, like public debts and deficits, is also worse.
The NITI Aayog’s March 2025 report presents a comparative picture for FY22. It shows that Bihar’s fiscal deficit was 0.7 percentage points (GSDP) higher than the median value for all states; its revenue deficit was 0.1 per cent, while the median value for all states was a surplus of 0.3 percent.
Similarly, in public debt, Bihar’s 39.6 per cent (of GSDP) was much higher than the median value of 33.6 per cent for all states.
Business-as-usual approach
Bihar is the third most populous state. As per the Census 2011, with 104 million people, Bihar accounted for 8 per cent of India’s total population, and its population density at 1,106 per sq km was much higher than the national average of 382.
Both its population and population density would have gone up further, given that its fertility rate of 3 children per woman is higher than the national average of 2 (NITI Aayog, 2025).
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Bihar is also home to the maximum poor, with below (national) average human development and per capita income. In the NITI Aayog’s multi-dimensional poverty index (MPI) of 2024, its headcount of MPI poor was 33.8 per cent, with Jharkhand coming a distant second with 28.8 per cent headcount.
Bihar also lags in growth vis-à-vis other states – average GSDP growth of 5.5 per cent during FY13-FY24, against 6.1 per cent GDP growth – and its fiscal health and budgetary allocations are worse than the average for all states.
Unless the Nitish Kumar regime mends its ways, the people of Bihar would be condemned to live a precarious life for many more decades. In case Kumar is defeated in the next month’s election, it would be imperative for the new government to change course.
