State Finances

Why in the News?

Comptroller and Auditor General (CAG) of India releases second edition of Publication on State Finances 2023-24. 

More on the News

• Publication on State Finances 2023-24 presents a consolidated and audited overview of the fiscal position of all 28 States.
• The edition also includes trend analysis covering 10 years from 2014–15 to 2023–24.

Fiscal position of states

• Revenue Receipts: States' Own Tax Revenue (SOTR) is the largest component of revenue receipts, contributing about 47 percent between 2014-15 and 2023-24.
  • Other components: Include share in Union Taxes and Duties (28 percent), Grants-in-aid (17 percent) and States' Non-Tax Revenue (8 percent).
    • Share in Union Taxes: Increased from 21.34 percent in FY 2014-15 to 29.77 percent in FY 2023-24 reflecting higher tax devolution under the Fourteenth and Fifteenth Finance Commissions.
• Capital Receipts: In the decade of 2014-15 to 2023-24, public debt receipts, as a percentage of total debt and non-debt capital receipts, have ranged between 94 to 99 percent.
• States' Expenditure: Decadal trend analysis over 2014-15 to 2023-24 shows that States' budgetary spending ranged between 16.15 percent and 17.49 percent of total combined GSDP.
  • Revenue Expenditure: During 2014-15 to 2023-24, states' revenue expenditure constituted 80-87 percent of the total expenditure.
    • Committed expenditure (salaries, pensions, interest payments, etc) and subsidies consistently absorbed more than half of revenue expenditure, reaching 51.76 percent in FY 2023-24.
  • Capital Expenditure: On average, capital expenditure of the States has remained in the range of 13-20 percent of the total budgetary spending during 2014-15 to 2023-24.
• Revenue and Fiscal Deficits: During FY 2023-24, a total of 16 States were in Revenue Surplus, while 12 States were in Revenue deficit. 
  • In FY 2023–24, 18 States recorded fiscal deficits above the 3% of GSDP limit recommended by the Fifteenth Finance Commission.

Risks to State Finances and Implications

• Unconditional Cash Transfers (UCTs): Rapid scale-up and persistence of UCTs raise concerns about fiscal sustainability and medium-term growth (Economic survey finding in the box below)

• High Debt Levels: Mounting debt levels put pressure on State budgets through rising interest expenses. 
  • To meet higher interest payments, governments often cut down other productive expenditures, affecting medium term growth prospects.
• High Revenue Expenditure: Combined gross fiscal deficit of States rose from 2.6% of GDP in FY22 to 3.2% in FY25, while the combined revenue deficit increased from 0.4% to 0.7% of GDP, indicating continued borrowing to finance revenue expenditure.
• Growing Contingent Liabilities: Outstanding guarantees of States increased from 2% of GDP at end-March 2017 to 3.9% at end-March 2024, putting debt-servicing pressure on states. 

Way Forward to Strengthen State Finances

• Conditional Cash Transfers: As suggested by the economic survey, Cash support can be designed as conditional, review-based, and time-bound, reducing long-term fiscal rigidity.
  • For instance, Mexico's Progresa/Oportunidades, families received cash only if children attended school regularly and pregnant women and young children visited health clinics for check-ups and nutrition monitoring.
• Improving Revenue: Through digitalisation and administrative streamlining, by broadening the tax base, raising property taxes, adopting new taxes, and reorienting spending toward capacity- and infrastructure-enhancing investments that promise to boost states' GSDP and revenues further.
• Addressing Contingent Liabilities: Adopt institutional reforms, such as creating self-standing debt management offices responsible for forecasting contingent liabilities and executing the state government's debt management strategy.
• Fiscal Council: Each state could create its own independent fiscal council, whose members would include academics, financial market participants and other experts.