CAG flags states' fiscal stress as debt, committed spending erode revenue gains | Today News

New Delhi: India’s states entered FY24 with stronger revenue inflows but ended the year under mounting fiscal stress, as rising debt and fixed spending commitments eroded fiscal flexibility, the Comptroller and Auditor General of India (CAG) said. More than half of their revenue expenditure was locked into salaries, pensions, interest payments and subsidies, limiting room for investment or shock absorption despite improved collections, according to the State Finances 2023-24 report.

The second edition of the publication, released by CAG K. Sanjay Murthy, presents a consolidated and audited assessment of the finances of all 28 states, allowing comparisons across states and over a decade from FY15 to FY24.

The report shows total revenue receipts of states were at ₹37.93 lakh crore in FY24. States’ own tax revenue formed the largest component at about 50% of these receipts, followed by the share in Union taxes at nearly 30%, grants-in-aid at around 12% and non-tax revenue at just over 8%. Over the past decade, the share of own tax revenue and tax devolution has steadily increased, while dependence on grants has declined.

However, the CAG noted that the buoyancy of its own tax revenue weakened in FY24, suggesting that the pace of revenue growth did not fully keep up with economic expansion.

As per the report, large disparities persist across states in their ability to raise their own resources. States such as Haryana, Maharashtra, Karnataka, Telangana, Tamil Nadu and Gujarat derived more than 60% of their revenue from their own taxes, while several northeastern and hill states, along with Bihar, remained heavily dependent on central transfers, it said.

On the spending side, states' total expenditure rose to ₹46.81 lakh crore, equivalent to over 16% of combined gross state domestic roduct (GSDP). Revenue expenditure dominated budgets, accounting for over 83% of total spending, while capital expenditure was at ₹7.84 lakh crore, or about 17% of total expenditure.

Although capital spending has increased in absolute terms over the decade, its share in total expenditure has remained modest, reflecting limited fiscal space for growth-enhancing investments.

A key concern highlighted by the national auditor is the growing rigidity in state budgets. Committed expenditure—salaries, pensions and interest payments—absorbed a large share of revenue expenditure, with significant variation across states.

The report also draws attention to the weaknesses in expenditure classification and transparency. States continue to follow non-uniform practices in classifying spending at the object head level, affecting comparability and fiscal analysis. To address this, the CAG has advised harmonization and rationalization of object heads across the Union and states, to be adopted from FY28, a reform seen as critical to improve the quality of public expenditure data.

Debt indicators point to rising fiscal risks. Outstanding public debt of states reached ₹67.87 lakh crore as of March 2024, equivalent to 23.42% of combined GSDP.

“Thirteen states breached the indicative debt ceiling recommended by the Fifteenth Finance Commission. Debt levels varied sharply, ranging from below 20% of GSDP in some states to over 50% in others, highlighting uneven fiscal resilience,” the CAG report noted.

Deficit indicators also weakened in FY24. While 16 states reported revenue surpluses, 12 remained in revenue deficit. More importantly, 18 states recorded fiscal deficits above the 3% of GSDP benchmark. The CAG report noted that fiscal deficit rose sharply in several large states during the year, particularly Chhattisgarh, Karnataka, Maharashtra, Rajasthan, Telangana and Uttar Pradesh.

“The findings of CAG report suggest that while states have benefited from higher tax devolution and improved their own tax collections over the past decade, their overall fiscal health remains fragile," said Abhash Kumar, associate professor of economics at Delhi University. "The dominance of revenue expenditure, rising committed spending, expanding debt and frequent breaches of fiscal norms limit states’ ability to invest and respond to economic shocks.”

In FY24, revenue expenditure accounted for 83.25% of states’ total expenditure, or 13.45% of combined GSDP, with a large share of this spending effectively locked in. Salaries, pensions and interest payments, classified as committed expenditure, absorbed 43.28% of revenue expenditure, while subsidies accounted for another 8.48%. The burden of committed spending varied widely across states, ranging from as high as 73% of revenue expenditure in Nagaland to about 31% in Maharashtra.

Together, the states' committed expenditure and subsidies amounted to around ₹20.17 lakh crore, or nearly 52% of total revenue expenditure of ₹38.97 lakh crore. In addition, states spent about ₹3.17 lakh crore on grants-in-aid for salaries paid to autonomous bodies and other grantees, a category similar in nature to committed expenditure.

Including these grants, the total outgo on committed expenditure, subsidies and grants-in-aid salaries rose to about ₹23.34 lakh crore in FY24, underscoring how limited fiscal flexibility has become for most states.