CAG Report on Fiscal Health of States

Syllabus Areas:

GS II - Polity, Governance

The consolidated CAG overview and a set of State Finances Audit Reports for 2023–24 were tabled in state legislatures and Parliament in 2024–2025 (multiple state reports and a central-level compilation were published/tabled, the consolidated report for 2023–24 was tabled in August 2025). The timing matters because these figures shape state budgets, borrowing plans and Centre-state fiscal dialogues going into the next budget cycles.

Background — what the CAG examines in state finance reports

CAG “State Finances Audit Reports” typically cover:

  • Revenue receipts (own tax and non-tax revenue, central transfers) and revenue expenditure.
  • Capital expenditure and fiscal deficit.
  • Outstanding fiscal liabilities (public debt + public account liabilities).
  • Committed expenditure (salaries, pensions, interest payments).
  • Off-balance and contingent liabilities (guarantees, public account items).
  • Quality of budgetary reporting and compliance with rules (FRBM targets, disclosures).

Comptroller and Auditor General of India (CAG)

Constitutional Provisions

  • Article 148: Establishes the office of the CAG.
    • Appointed by the President of India.
    • Holds office for a term of 6 years or until 65 years of age, whichever earlier.
    • Removal process similar to that of a Supreme Court judge (for proven misbehaviour or incapacity).
  • Articles 149–151: Define duties, powers, and functions.
    • Art. 149: Parliament determines CAG’s duties via law (CAG’s Duties, Powers and Conditions of Service Act, 1971).
    • Art. 150: Accounts of Union and States to be kept in the form prescribed by the President on the advice of CAG.
    • Art. 151: Reports of CAG relating to Union are submitted to the President, who lays them before Parliament; for states, reports are submitted to the Governor, who lays them before the State Legislature.

    Role and Functions

    • Audits all expenditure from the Consolidated Fund of India and of the states.
    • Audits accounts of bodies substantially financed by government funds.
    • Ensures accountability of public money and proper financial management.
    • Acts as the “Guardian of the Public Purse”.

Methodology (how CAG reached conclusions)

  • The CAG aggregates state Finance Accounts, budget documents and monthly reports to compute trends over 5–10 year windows.
  • It examines debt-to-GSDP ratios, revenue vs capital balance, and composition of receipts/expenditure to judge sustainability.
  • For the decadal review, the CAG compared aggregates across states over a 10-year span to identify structural changes (growth of public debt, trend in revenue surpluses/deficits, scale of committed expenditure).

Key findings

  • Public debt has jumped dramatically. States’ combined public debt rose from about ₹17.6 lakh crore (2013–14) to around ₹59.6 lakh crore by 2022–23 — roughly a threefold increase in ten years. This is the single clearest risk to fiscal sustainability flagged by the CAG.
  • More states show revenue surplus, but it’s uneven. In 2022–23 several states recorded revenue surpluses (driven by higher tax devolution, improved collections or one-off receipts). Uttar Pradesh and a few others posted sizeable revenue surpluses, but many states still run structural revenue deficits. Surplus on revenue account does not eliminate long-term debt concerns
  • Committed (non-discretionary) expenditure has risen sharply. Salaries, pensions and interest payments increased about 5× over the last decade; subsidies and other recurrent commitments also expanded — shrinking discretionary space for capital outlay. The CAG highlights this as a major structural constraint.
  • Off-budget and contingent liabilities are worrying. Rising public account liabilities and contingent liabilities (state guarantees, public-private partnership obligations) mean actual fiscal stress is higher than headline debt numbers suggest.
  • Debt-to-GSDP ratios vary but remain a risk. While aggregate debt-to-GSDP fell slightly for some states due to high GSDP growth, the absolute quantum of borrowings and interest burden rose — so the risk profile has worsened even when ratios look stable.
CAG Report on Fiscal Health of States

State-wise patterns and notable examples

  • High-surplus states: A handful of large states reported substantial revenue surpluses in recent years — e.g., Uttar Pradesh reported a large revenue surplus in 2022–23 — but surpluses are not uniform and sometimes reflect accounting/timing or one-off transfers.
  • High-debt states: Several states recorded large increases in outstanding liabilities driven by market borrowings, off-budget liabilities, and public enterprises. The CAG flags that debt servicing will crowd out capital spending if unchecked.

Causes — why did this happen?

  • Heavy reliance on market borrowings for routine expenditures and capital projects.
  • Rising wage and pension bills after pay commissions and expanding public employment.
  • Subsidy expansion (both economic and social subsidies) without steady revenue backing.
  • Insufficient own-tax buoyancy in some states; reliance on central transfers which may be volatile.
  • Inadequate fiscal risk management — poor disclosure of guarantees, contingent liabilities and PPP commitments.

Fiscal risks and implications

  • Crowding out of capital spending: More resources go to salaries, pensions and interest, leaving less for physical and human capital.
  • Higher refinancing risk: Larger debt stock increases vulnerability to interest-rate shocks and changes in market sentiment.
  • Reduced ability for counter-cyclical fiscal policy: States will find it harder to spend during downturns.
  • Intergenerational equity problem: Current borrowings may finance current consumption rather than long-lived assets, burdening future taxpayers.

What the CAG recommends

  • Improve transparency and disclosure: publish complete data on guarantees, off-budget liabilities and PPP commitments.
  • Strengthen fiscal rules and compliance: adhere to FRBM targets, set realistic rolling targets for deficits and debt.
  • Prioritise capital over revenue spending: shift composition of expenditure toward productive capital projects with clear returns.
  • Improve tax buoyancy: widen tax base, modernise tax administration and reduce dependence on volatile transfers.
  • Medium-term fiscal framework: adopt multi-year ceilings and a three-year rolling target approach for fiscal indicators.

Policy options for states — practical steps (what must be done)

  1. Immediate audit of contingent liabilities and a public “balance-sheet” for state governments.
  2. Hire independent fiscal councils or use independent ex-ante costing for large subsidy and guarantee decisions.
  3. Reform salary and pension trajectories via better actuarial planning and targeted hiring freezes where necessary.
  4. Prioritise revenue-generating capital projects (user fees, monetisable assets) and stop routine borrowing for recurring subsidies.
  5. Adopt a medium-term fiscal plan (3–5 years) with binding targets for primary deficit and debt-to-GSDP, plus trigger conditions for corrective action.

Criticisms and caveats (what the CAG cannot fully capture)

  • Inter-state differences: Aggregates hide large state-level variation; each state’s context (GSDP growth rate, revenue base, social obligations) matters.
  • One-off receipts/distortions: Some surpluses may be due to asset sales, exceptional transfers, or timing of payments — not sustainable improvements.
  • GDP/GSDP denominator effects: Rapid GSDP growth can mechanically reduce debt-to-GSDP even if absolute debt rises. Read ratios alongside levels

The CAG’s evidence is blunt: states’ absolute debt has ballooned, committed expenditures have eroded fiscal flexibility, and many liabilities remain poorly disclosed. That combination is a recipe for fiscal fragility. States that ignore this will watch their borrowing costs climb, development projects stall, and future budgets become all about paying wages and interest rather than building schools, hospitals and roads. The solution is not painless — it requires political will to curb non-productive recurrent spending, boost tax effort, and tighten fiscal risk management — but postponing it will make the eventual correction harsher

Mains Questions:

  • The recent CAG report highlights a sharp rise in states’ public debt and committed expenditure. Discuss the implications of these trends for fiscal sustainability and intergenerational equity. (250 words)
  • Evaluate the effectiveness of state-level Fiscal Responsibility and Budget Management (FRBM) Acts in curbing fiscal deficits and debt, in light of the latest CAG findings. (250 words)