The Comptroller and Auditor General of India (CAG) has delivered a sobering assessment of state finances, revealing that while India's states began the 2023-24 fiscal year with stronger revenue, they ended it under significant fiscal strain. Mounting debt and inflexible spending commitments have severely eroded their financial flexibility, according to the State Finances 2023-24 report.
Revenue Growth Masks Underlying Weaknesses
The consolidated audit report, presented by CAG K. Sanjay Murthy, shows that the total revenue receipts for all 28 states reached ₹37.93 lakh crore in FY24. The largest component, constituting about half, came from states' own tax revenue. This was followed by their 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, from FY15 to FY24, states have steadily increased their share of own tax revenue and tax devolution, reducing dependence on central grants. However, the CAG flagged a worrying trend: the buoyancy of states' own tax revenue weakened in FY24, indicating that revenue growth did not fully match the pace of economic expansion.
State GST emerged as the single-largest source of own tax revenue, accounting for approximately 43% of the total. This underscores the critical importance of GST stability for state budgets. The report also highlighted vast disparities in fiscal capacity. States like Haryana, Maharashtra, Karnataka, Telangana, Tamil Nadu, and Gujarat derived more than 60% of revenue from their own taxes. In contrast, several northeastern and hill states, along with Bihar, remained heavily reliant on central transfers.
Spending Rigidity and Rising Debt Risks
On the expenditure front, total state spending rose to ₹46.81 lakh crore, which is over 16% of the combined Gross State Domestic Product (GSDP). A dominant portion—over 83%—was revenue expenditure, with capital expenditure making up only ₹7.84 lakh crore or about 17% of the total. Although capital spending has grown in absolute terms over ten years, its share remains modest, pointing to limited fiscal space for growth-enhancing investments.
The national auditor raised a red flag on the growing rigidity in state budgets. A massive share of revenue spending is locked into committed expenditures like salaries, pensions, and interest payments, leaving little room for maneuver. In FY24, revenue expenditure accounted for 83.25% of total spending. Within this, committed expenditure and subsidies consumed nearly 52% of the total revenue expenditure of ₹38.97 lakh crore.
Debt indicators signal escalating fiscal risks. The outstanding public debt of states hit ₹67.87 lakh crore by March 2024, equivalent to 23.42% of combined GSDP. Alarmingly, thirteen states breached the indicative debt ceiling recommended by the Fifteenth Finance Commission. Debt levels varied wildly, from below 20% of GSDP in some states to over 50% in others.
Deficits, Liquidity Stress, and Call for Reform
Fiscal health deteriorated in FY24. While 16 states managed a revenue surplus, 12 remained in revenue deficit. More critically, 18 states recorded fiscal deficits above the 3% of GSDP benchmark. Large states like Chhattisgarh, Karnataka, Maharashtra, Rajasthan, Telangana, and Uttar Pradesh saw their fiscal deficits rise sharply during the year.
Liquidity stress became a tangible concern, with 16 states resorting to Ways and Means Advances (WMA) from the Reserve Bank of India. Rajasthan, Andhra Pradesh, and Telangana accounted for roughly 62% of the total WMA and overdraft availed. States like Telangana, Andhra Pradesh, Rajasthan, and Punjab depended on WMA for most of the year, indicating persistent cash flow problems rather than temporary mismatches.
The CAG report also criticized weaknesses in expenditure classification and transparency, noting non-uniform practices across states that hamper comparability. To remedy this, the CAG has advised harmonizing object heads across the Union and states, a reform slated for adoption from FY28.
Commenting on the findings, Abhash Kumar, an associate professor of economics at Delhi University, said the report suggests that despite better tax devolution and improved collections over the decade, the overall fiscal health of states remains fragile. The dominance of revenue expenditure, rising committed spending, expanding debt, and frequent breaches of fiscal norms severely limit states' ability to invest and cushion against economic shocks.
