New Delhi: Indian states entered FY24 with stronger revenue inflows but ended the year under increasing fiscal stress as rising debt and fixed expenditure obligations eroded fiscal flexibility, India’s Comptroller and Auditor General (CAG) said. More than half of their revenue expenditure was tied up in salaries, pensions, interest payments and subsidies, according to the State Finance Report 2023-24, limiting scope for investment or absorbing shocks despite better collections.
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, enabling comparison across states and over a decade from FY15 to FY24.
The report shows that the total revenue of the states was up to par ₹37.93 lakh crore in FY24. States’ own tax revenue formed the largest component at around 50% of this revenue, followed by Union tax share of nearly 30%, grants at around 12% and non-tax revenue at a little over 8%. Over the past decade, the share of own tax revenue and tax decentralization has steadily increased, while dependence on grants has decreased.
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However, the CAG noted that its own tax revenue growth weakened in FY24, suggesting that the rate of revenue growth has not fully kept pace with economic expansion.
According to the report, large differences persist between states in their ability to raise their own resources. States like Haryana, Maharashtra, Karnataka, Telangana, Tamil Nadu and Gujarat raised 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, he said.
The single-largest source
The state’s GST continued to be the single largest source of own tax revenue, accounting for about 43% of the total, underscoring the central role of GST stability in state finances, the report showed.
On the expenditure side, the total expenditure of the states increased to ₹46.81 lakh crore, which is equivalent to more than 16% of the combined gross domestic product (GSDP). Budgets were dominated by revenue expenditure, which accounted for more than 83% of total expenditure, while capital expenditure was at ₹7.84 million crowns, i.e. about 17% of total expenses.
Although capital expenditure has increased in absolute terms over the decade, its share of total expenditure remained modest, reflecting limited fiscal space for growth-enhancing investment.
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The main concern highlighted by the national auditor is the increasing rigidity of state budgets. Compulsory expenditure – salaries, pensions and interest payments – absorbed a large share of revenue expenditure, with significant differences between states.
The report also highlights shortcomings in the classification of expenditure and transparency. States continue to follow inconsistent practices in classifying expenditures at the object head level, which affects comparability and fiscal analysis. To address this, the CAG has recommended harmonization and rationalization of object heads across the Union and states to be adopted from FY28, a reform considered essential to improve the quality of public expenditure data.
Debt indicators point to growing fiscal risks. Outstanding public debt of states achieved ₹67.87 lakh crore by March 2024, which is equivalent to 23.42% of the combined GDP.
“Thirteen states breached the indicative debt ceiling recommended by the Fifteenth Finance Commission. Debt levels varied widely, from less than 20% of GSDP in some states to over 50% in others, highlighting uneven fiscal resilience,” the CAG report said.
Deficit indicators also weakened in FY24. While 16 states posted revenue surpluses, 12 remained in revenue deficit. More importantly, 18 states recorded fiscal deficits above the 3% GSDP benchmark. The CAG report said the fiscal deficit rose sharply in several large states during the year, especially in Chhattisgarh, Karnataka, Maharashtra, Rajasthan, Telangana and Uttar Pradesh.
Liquidity stress
A liquidity problem also emerged during FY24, with 16 states resorting to Ways and Means (WMA) advances from the Reserve Bank of India. Rajasthan, Andhra Pradesh and Telangana together accounted for about 62% of the total WMAs and overdrafts used during the year, while Telangana, Andhra Pradesh, Rajasthan and Punjab remained dependent on WMAs for most of the year, indicating near-continuous cash flow stress rather than temporary mismatches. In contrast, 12 states did not use any WMA during FY24, reflecting large differences in liquidity positions among states.
“The CAG report’s findings suggest that while states have benefited from greater tax decentralization and improved their own tax collection 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 liabilities, rising debt and frequent violations of fiscal norms limit states’ ability to invest and respond to economic shocks.”
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In FY24, revenue expenditure accounted for 83.25% of the states’ total expenditure or 13.45% of the combined GSDP, with a large proportion of this expenditure effectively locked in. Classified as liability expenditure, salaries, pensions and interest payments absorbed 43.28% of revenue expenditure, while subsidies accounted for another 8.48%. The burden of committed expenditure varied widely across states, from 73% of revenue receipts in Nagaland to around 31% in Maharashtra.
Together, state obligations and subsidies amounted to approx ₹20.17 million crowns, or almost 52% of total revenue expenditure ₹38.97 million crowns. In addition, states spent approx ₹3.17 lakh crore for salary subsidies paid to autonomous bodies and other grant recipients, a category similar in nature to liability expenditure.
Including these grants, the total expenditure on obligations, subsidies and grant salaries increased to approx ₹23.34 lakh crore in FY24, underscoring how limited fiscal flexibility has become for most states.
