Inside the Finances of Indian States: A Reality Check
Our goal with The Daily Brief is to simplify the biggest stories in the Indian markets and help you understand what they mean. We won’t just tell you what happened, but why and how too. We do this show in both formats: video and audio. This piece curates the stories that we talk about.
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In today’s edition of The Daily Brief:
How Are Indian States Doing?
Insider Trading in HDFC Merger Uncovered
Credit Card Storm: Higher Costs Ahead
How Are Indian States Doing?
The Reserve Bank of India (RBI) recently released its annual report on state finances, and it’s packed with insights that affect all of us. This isn’t just about big numbers or policies—it’s about how your state earns, spends, and manages its money, which ultimately impacts your life, from the quality of roads to the cost of electricity.
Every state in India has its own budget, just like the central government. States collect their own revenue from taxes and other sources, but they also depend on funds from the central government. This money is used to pay for everything, from schools and hospitals to infrastructure projects and subsidies. How states manage their money—whether they’re spending more than they earn, how much they borrow, and where they spend—determines their financial health.
A fiscal deficit occurs when a state spends more than it earns. Back in the early 2000s, states had a worrying fiscal deficit of 4.3% of India’s GDP. But they’ve managed to bring this down to below 3% for three consecutive years—a commendable feat. Why does this matter? Because a lower fiscal deficit indicates better financial discipline and less reliance on borrowing.
But here’s the twist: while the fiscal deficit is under control, state debts remain high. Currently, state debt is at 28.5% of GDP, far above the recommended level of 20%. High debt means states are borrowing heavily, which could become a problem if their revenues don’t grow fast enough.
States need money to cover their deficits, and the way they raise this money has changed significantly. In 2005-06, only 17% of their deficit financing came from the market (like bonds). Now, it’s a massive 79%. This shift means states are relying less on traditional sources like the National Small Savings Fund and more on selling bonds—financial instruments where states promise to pay back the borrowed money with interest. These bonds, called state development loans (SDLs), work similarly to central government bonds but are issued by individual states.
While this makes states more self-reliant, it also means they’re more exposed to market risks. If interest rates rise, borrowing will become more expensive.
States have two main sources of revenue:
Their Own Revenue
This includes taxes like SGST (the state’s share of GST), excise duties on alcohol, property stamp duties, and vehicle taxes. The good news is that states’ tax collections have become stronger since the pandemic. Tax buoyancy—a measure of how tax revenue grows with the economy—has improved from 0.86 before the pandemic to 1.44 now. This means states are collecting taxes more efficiently.
States also earn non-tax revenue from things like mining leases, service fees, and user charges. Odisha is a standout here. The state has cleverly tied mining premiums to market prices, ensuring steady income even when commodity prices fluctuate.
Transfers from the Centre
States receive a share of central taxes—41% of what the central government collects—and various grants. Over the years, the method of transferring funds has shifted. Tax devolution (sharing tax revenue) has become the primary mode, giving states more freedom to decide how to use the money. GST, introduced in 2017, has been a game-changer. It’s reduced the gap between high-tax and low-tax states, making revenue collection more balanced across the country.
Spending patterns tell a lot about a state’s priorities. One key measure is the RECO ratio—how much states spend on day-to-day expenses (like salaries and subsidies) versus investments in infrastructure and development. A lower ratio means more is being invested in the future. While the average RECO ratio has improved from 6.3 in 2021-22 to 5.2 now, some states are still spending ten times more on daily expenses than on future investments.
Here’s where things get tricky—subsidies and freebies. Many states are offering farm loan waivers, free electricity, and cash transfers. While these provide immediate relief, they put significant strain on state finances and often come at the cost of crucial development spending.
Challenges in Key Sectors
Power Sector (DISCOMs)
Electricity distribution companies, or DISCOMs, are a financial black hole for many states. Despite multiple reforms, DISCOM debt has grown by 8.7% annually since 2016-17. By 2022-23, accumulated losses hit ₹6.5 lakh crore—2.4% of GDP. Six states account for 75% of these losses. The Centre has offered states additional borrowing space to implement power sector reforms, but the results have been mixed.
R&D Spending
Research and development are critical for innovation, but states spend just 0.1% of GDP on R&D. Most of this goes to medical research, health, and agriculture. This lack of investment could hamper long-term growth.
Pensions
The shift from the old pension scheme (OPS) to the new pension scheme (NPS) was meant to reduce fiscal stress. However, some states are reverting to OPS, which offers guaranteed benefits but adds to long-term financial burdens. The Centre is trying to strike a balance with a new Unified Pension Scheme, offering states incentives to stick with NPS.
States are adopting technology to improve governance and revenue collection. For instance:
Gujarat has GST Seva Kendras for easier tax registration.
Haryana uses QR code-based tracking for its alcohol supply chain.
Delhi is developing AI-driven faceless GST administration.
These innovations aren’t just buzzwords—they’re delivering real results in tax compliance and revenue growth.
On the institutional front, states like Gujarat and Maharashtra have partnered with NITI Aayog to set up think tanks focused on data-driven policymaking. These efforts aim to bring a more analytical approach to governance.
Climate change is becoming a major fiscal risk. Odisha is leading the way with climate budgeting and a Budget Stabilization Fund. Other states need to follow suit to prepare for future challenges.
However, transparency remains a concern. States report their finances differently, making it hard to get a clear picture. Uniform reporting standards and better quarterly data are critical, especially as India commits to global data transparency initiatives.
The RBI’s report highlights three priorities for states:
Control Subsidies: States need to rethink their freebies and focus on sustainable spending.
Rationalize Expenditure: Invest more in future development rather than daily operations.
Improve Transparency: Standardized reporting and robust data systems are essential.
States also need a clear roadmap for reducing debt and increasing revenue efficiency. The path won’t be easy, but with careful planning and innovation, they can balance their budgets and invest in a brighter future.
This report isn’t just a wake-up call for policymakers—it’s a chance for all of us to understand how our states function and what needs to change. After all, every rupee spent or saved today shapes the India we’ll live in tomorrow.
Insider Trading in HDFC Merger Uncovered
In the next story, let’s discuss an insider trading case SEBI recently wrapped up. This case is connected to the HDFC-HDFC Bank merger, which was a landmark event in Indian banking. But before diving into the details, let’s first break down what insider trading means and why it’s such a big deal.
Imagine you’re playing a card game. If someone at the table could secretly see everyone’s cards, they’d have a massive advantage. That’s basically what insider trading is but in the stock market. It happens when someone uses confidential information—something not yet public—to buy or sell stocks.
For example, let’s say a person knows in advance that a company is about to announce a merger, a new product, or something else that could push the stock price up. If they trade stocks based on that information, it gives them an unfair advantage over regular investors. It undermines trust in the markets because not everyone is playing on an equal field. This is why regulators like SEBI keep a close eye on such activities.
Now, let’s talk about the event that triggered this case. In April 2022, HDFC Ltd announced its merger with HDFC Bank. This wasn’t just another deal; it was one of the biggest mergers in Indian banking history. Deals of this magnitude tend to drive up stock prices because they promise new opportunities for growth and profitability.
However, SEBI noticed something odd. Before the merger was officially announced, there was unusual trading activity in the stocks of both HDFC and HDFC Bank. It was as if someone already knew about the merger and was trying to profit from it. This suspicion led SEBI to investigate further.
SEBI’s investigation uncovered two key individuals involved in this case: Nimai Parekh and his close friend, Rahil Dalal.
Parekh worked at Deloitte, which had been hired by HDFC Bank on March 29th, 2022, to help evaluate the merger. This role gave him early access to sensitive information about the deal—information that wasn’t public yet. According to SEBI, Parekh didn’t trade stocks himself; that would have been too obvious. Instead, he passed the information on to Dalal.
But Dalal didn’t trade in his own name either. Instead, he used his father’s Hindu Undivided Family (HUF) account to make the trades.
Now, let’s pause for a moment to understand what exactly they traded. Instead of buying shares directly, Dalal purchased call options for both HDFC and HDFC Bank. Call options are contracts that give the buyer the right to purchase a stock at a specific price in the future. If the stock price goes up, the value of these options increases significantly.
When the merger was announced, the stock prices of HDFC and HDFC Bank soared, as expected. Dalal then sold the call options, making a tidy profit of ₹5.67 lakhs from HDFC options and ₹2.52 lakhs from HDFC Bank options—a total of over ₹8 lakhs.
What sealed the case for SEBI was the trail left behind. During the critical period leading up to the merger announcement, there was frequent communication between Parekh and Dalal. It was clear that they were coordinating their actions. While they tried to be clever by using a family account and trading in options, SEBI managed to connect the dots.
Once SEBI had enough evidence, Parekh and Dalal opted for a settlement order. This is a legal arrangement where the accused neither admits nor denies their guilt but agrees to pay a fine to close the case.
Parekh, being the one who leaked the information, was fined ₹39 lakhs. Dalal, who carried out the trades, paid ₹35 lakhs. Both fines were paid in December 2024, and the settlement order officially took effect on December 20th, 2024.
Interestingly, SEBI included a clause stating that if they later discover any false information or discrepancies, they reserve the right to reopen the case. In other words, the accused are still under scrutiny.
This case shows how insider trading methods are becoming more sophisticated. People are no longer directly buying stocks in their names. Instead, they’re using family accounts, trading in complex financial instruments like call options, and creating layers between the information source and the actual trades.
However, it also highlights how SEBI’s detection mechanisms are evolving. The regulator isn’t just relying on traditional methods to catch wrongdoers. They’re using advanced tools to track unusual patterns and connect seemingly unrelated dots, ensuring that even the most well-hidden schemes come to light.
Insider trading isn’t just about bending the rules; it’s about breaking the trust that makes financial markets work. Cases like this remind us why regulators exist—to ensure fairness and keep markets functioning on an even playing field.
For SEBI, this case is another step in a constant battle to stay ahead of those trying to game the system. For the rest of us, it’s a reassurance that someone is watching out for the fairness of the game.
Credit Card Storm: Higher Costs Ahead
Imagine you’re using a credit card, and you miss making a payment. What does your bank do? It charges you a massive interest on the overdue amount - it’s almost like a punishment for not paying on time.
Now, back in 2008, India's apex consumer rights body, the NCDRC, became a little uncomfortable with the high interest rates on credit card defaults. So, in a major ruling, they decided to cap the maximum interest banks could charge for overdue credit card payments from consumers like you and me.
But recently, on 20th December 2024, the Supreme Court of India set aside this ruling. By doing so, they effectively removed this interest rate cap on credit card defaults.
This is a big deal because it changes the dynamics of the credit card industry in India. Banks now have a lot more room to charge interest in cases of payment defaults. And as people who care about money and track the markets around us, it’s important to dig into what’s exactly happening here.
Let’s start with the background:
See, back in 2008, a consumer rights trust had gone to the National Consumer Disputes Redressal Commission (or the NCDRC). The aim was to fight the entire credit card industry. They complained that when people missed their credit card payments, banks overwhelmed them with interest. This, they felt, was a violation of their consumer rights.
They pointed out that the interest that banks charged was extremely high - sometimes as high as 50% per annum. To the NCDRC, this looked like the worst sort of predatory money lending. It decided that to safeguard consumers, banks should not charge more than 30% annual interest on overdue credit card payments.
At the time, regular lending rates for banks ranged between 10% to 15% annually. This cap, which was set at about 2-3 times those rates - seemed like a fair middle ground.
But, here’s where things get a little tricky. Comparing loan interest rates to penal interest on credit cards isn’t straightforward. With loans, you pay regular interest on the entire borrowed amount. With credit cards, penal interest kicks in if and only if you miss your payments. So, this makes the nature of the charge fundamentally different, and to some extent, incomparable.
Back to the Supreme Court, this whole thing for them wasn't a question of consumer rights at all. It was one of how payment products should be structured. There is another body that is more qualified to make these decisions - the RBI or the Reserve Bank of India. That’s why the Supreme Court set aside the NCDRC's ruling. As a result of this, banks can now set their own interest rates for overdue credit card payments based on market conditions and customer profiles, unless, of course, the RBI intervenes.
Now, from a rational perspective, this decision seems fair. After all, consumer rights protect people from businesses that are trying to exploit people. If banks clearly tell you in advance, that they'll charge high penalty rates if you don't pay them back on time, it doesn’t necessarily seem unreasonable. If that's a bad way to run a financial product, the RBI should step in.
But from a consumer’s point of view, there’s a flip side. Interest payments on defaults could now rise significantly.
According to the RBI, India currently has around ₹500 crore in overdue credit card dues. With these changes, the interest on this amount could increase by ₹80-100 crore, or even more in some cases. While this figure might sound small in isolation, there are only about 10 crore credit cards in circulation across the country. So, the effective jump in interest figures could be significant for individual cardholders. Put simply, people already struggling to pay their credit card bills - the very people who find it the most difficult to manage their money - might see their debt burden increase sharply, trapping them in a vicious cycle of debt.
This rise in interest rates could also have a negative impact on credit card NPAs (non-performing assets). To understand why this is concerning, look at the numbers: Credit card NPAs have been rising steadily over the last few years. According to the RBI, NPAs were ₹3,100 crore in FY 2022. They increased to ₹4,000 crore in FY 2023 and hit ₹5,500 crore by June 2024. If people now find it even harder to pay off their credit card bills, this problem could get even worse.
So, in the end, the question is - what does all this mean for you as a credit card user? See, if you don’t have much experience using credit cards, here are three basic but important tips to keep in mind:
Always pay your bills on time.
Be aware of the interest rates and conditions associated with your card before using it.
Use your card for expenses you can repay easily to avoid falling into a debt trap.
Credit cards can be an excellent financial tool when used wisely, but they can turn dangerous very quickly if mismanaged. So, please be very, very careful.
Tidbits
Jio lost 3.76 million users in October 2024, marking its fourth straight month of decline. Since June, it has shed 16.48 million users—a 3.45% drop in its subscriber base. In contrast, Airtel added 1.92 million users in October, recovering from a slump caused by July's tariff hike. Vodafone Idea (Vi) also lost 1.97 million users during the same period but fared better than Jio.
Waaree Energies is investing heavily in India's renewable energy sector. Key initiatives include ₹551 crores for a 300 MW electrolyser plant, ₹2,073 crores for a 3.5 GWh Lithium-Ion battery plant, and ₹130 crores to expand its inverter business, all leveraging the PLI scheme.
Honda and Nissan will merge under a joint holding company by August 2026, with Honda leading governance. Honda's ¥1.1 trillion ($7 billion) share buyback highlights its financial strength, while Nissan aims to recover from a 70% profit drop. The merger, including Mitsubishi Motors, targets ¥3 trillion in operating profits through economies of scale and shared resources.
-This edition of the newsletter was written by Kashish, Bhuvan and Anurag
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If the amount fir so small in HDFC case then something is amiss or just a smokescreen. I have a feet that much bigger trading of such nature keeps happening very frequently and we do hear anything about SEBI taking more such actions
Did I read that right? Those two guys made a profit of 5.67 lacs and 2.5 lacs, and were fined 35 lacs and 39 lacs... R u sure? The profit wasn't in crores?