18 States Miss Fiscal Deficit Target: CAG Report Warns of Worsening State Financial Health

18 States Miss Fiscal Deficit Target: CAG Report Warns of Worsening State Financial Health​

The Comptroller and Auditor General's (CAG) latest review of state finances reveals a sobering picture, indicating that a significant number of Indian states are struggling to meet fiscal deficit targets. As reported by Business Standard, up to 18 out of the nation's 28 states have breached the prescribed fiscal deficit threshold of 3 per cent of Gross State Domestic Product (GSDP) in the 2024-25 financial year.

The findings suggest a deepening layer of financial stress across state governments. The deterioration observed is reportedly comparable only to the period of fiscal strain witnessed during the Covid-19 pandemic year of 2020-21, according to the CAG's third annual review.

States Defy Fiscal Targets and Face Rising Red Ink​

A critical finding from the report details a marked increase in fiscal deficits across several states. Fourteen states, including Gujarat, Karnataka, Kerala, Maharashtra, and Odisha, registered an increase of more than 25 per cent in their fiscal deficit value terms compared to the previous year.

The sheer magnitude of state liabilities remains a key concern for financial stability. Aggregate liabilities of states increased over the past decade. Total liabilities as a share of GSDP rose to 27.89 per cent in FY25, up from 24.19 per cent recorded in FY16.

The report also noted that state liabilities continue to exhibit wide disparities across states. For instance, Arunachal Pradesh's liabilities stood at 52.84 per cent of GSDP, compared to Odisha's liabilities which were reported at 15.79 per cent of GSDP.

Revenue Surpluses Decline Amid Financial Strain​

The CAG review highlighted a negative trend concerning revenue surpluses across states. Only 13 states managed to record a revenue surplus in FY25, down from the 16 states that achieved this status in FY24. Bihar, Mizoram, and Telangana specifically slipped from revenue surplus into a revenue deficit during the reviewed year.

The auditor quoted observations indicating that all states together remained in revenue and fiscal deficit for the period spanning 2015-16 to 2024-25. This outcome is compounded by the substantial increase in both fiscal and revenue deficits observed specifically in FY21 and FY25.

Expert Analysis on Debt Management and Fiscal Rigidity​

The findings underscore structural rigidities inherent in state financial management, as noted by the CAG. Despite a substantial rise in total expenditure over the period from FY16 to FY25, the expenditure structure remained largely unchanged. Salaries, pensions, interest payments, subsidies, and grants accounted for a substantial share of spending, indicating significant fiscal rigidity.

DK Srivastava, Chief Policy Advisor at EY India, provided context on state and central liabilities. He noted that combined liabilities for all states, encompassing both public debt and public account liabilities, amounted to approximately 28.5 per cent of nominal GDP under the revised national accounts series.

Srivastava also compared these figures against the Government of India (GoI). The total liabilities of the GoI, net of on-lending to the states, were estimated at 55.4 per cent of GDP in 2024-25. He observed that if both levels of government are evaluated against the Fiscal Responsibility and Budget Management (FRBM) 2018 norms, they exceed their respective target levels of 40 per cent for the GoI and 20 per cent for the states.

Revenue Generation and Capital Flows in State Finances​

On the revenue front, state's own tax revenue (SOTR) continued to be the primary contributor to revenue receipts. Its contribution rose from about 49.55 per cent to nearly 50.13 per cent in FY25, though its growth momentum moderated compared to the previous year.

The report also tracked changes in financial support mechanisms. States saw an increase in their share of Union tax transfers, reflecting higher tax devolution under the Fourteenth and Fifteenth Finance Commissions. Concurrently, dependence on grants-in-aid and central assistance declined, even though non-tax revenue registered growth in absolute terms.

Borrowings remained the dominant source of capital receipts for states in FY25. Capital expenditure was recorded at 16.59 per cent of total spending. The overall findings suggest continuing pressure on state finances even as some revenues recover, with multiple states grappling with elevated deficits and debt levels.