A recent publication by the Comptroller and Auditor General of India (CAG) highlights significant fiscal challenges for Indian states, with a majority exceeding recommended deficit thresholds. The 'Publication on State Finances 2024-25' indicates that revenue expenditure continues to absorb the lion's share of state budgets, pointing to persistent fiscal rigidity across the nation.
Fiscal Deficits Climb for Many States
The CAG report reveals a concerning trend: as many as 18 states recorded fiscal deficits exceeding the 3% threshold recommended by the 15th Finance Commission in the financial year 2024-25. This metric is a crucial indicator of fiscal health, and its breach by so many states underscores growing financial pressures.
Furthermore, the report noted a mixed picture regarding revenue balances. While 13 states achieved a revenue surplus in FY25, 15 states found themselves in a revenue deficit, signifying that their non-debt receipts were insufficient to cover their day-to-day operational expenses.
States with Rising Deficits
Several states experienced a substantial increase in their fiscal deficits, with 14 states seeing a rise of over 25% in FY25 compared to FY24. These include Andhra Pradesh, Assam, Gujarat, Jharkhand, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Meghalaya, Mizoram, Nagaland, Odisha, Tripura, and Uttarakhand.
Revenue Expenditure Dominates Budgets
A key finding from the CAG's 10-year comparative overview (2015-16 to 2024-25) is the continued dominance of revenue expenditure. On average, over 83% of total state spending was allocated to revenue purposes, such as salaries, pensions, interest payments, and subsidies. While capital expenditure saw absolute increases, its share relative to total spending remained comparatively small.
The report points to significant fiscal rigidity, as committed expenditures—including salaries, pensions, interest payments, subsidies, and grants—consistently absorbed more than half of the revenue expenditure, reaching 53.31% in FY25. Subsidies, in particular, demonstrated rapid growth during this period. Grants-in-aid also continued to account for nearly one-third of all revenue spending.
Focus on Social and Economic Services
Despite the high revenue expenditure, states collectively directed approximately two-thirds of their total spending towards social and economic services. This reflects a consistent focus on welfare initiatives and developmental programs aimed at their populations.
States' aggregate expenditure saw a sharp rise of 131% between 2015-16 and 2024-25, broadly keeping pace with economic growth. However, the underlying structure of this expenditure remained largely unchanged, reinforcing concerns about the inflexibility of state budgets.
Revenue Streams and Weakening Buoyancy
In terms of revenue generation, States’ Own Tax Revenue (SOTR) remains the largest component of revenue receipts, increasing its share to 50.13% in FY25 from 49.55%. However, the buoyancy of SOTR weakened in FY25 compared to the previous year. The states' share in Union taxes grew markedly, attributed to higher tax devolution under the Fourteenth and Fifteenth Finance Commissions, leading to a decreased reliance on grants-in-aid and central assistance.