State Financial Reporting in India: Challenges and Reforms

Overview of Odisha's Capital Expenditure

In 2023-24, Odisha reported a capital expenditure of ₹43,273 crore. However, audits revealed that ₹4,565 crore of this was misclassified revenue expenditure, leading to a revised capital expenditure of ₹38,708.75 crore and a capex-to-GSDP ratio drop from 5.07% to 4.54%.

Systemic Issues in State Financial Accounting

• India lacks a standardized, comparable state accounting system, leading to inconsistencies in capex, revenue deficits, and development spending classifications.
• In FY24, auditors identified ₹10,579.19 crore misclassified across 10 states, impacting fiscal transparency and accuracy.

Misclassification of Grants

Indian Government Accounting Standard-2 (IGAS-2) mandates that grants-in-aid should be classified as revenue expenditure, yet several states, including Maharashtra and Chhattisgarh, misclassified such grants as capital expenditure, cumulatively amounting to ₹5,310.97 crore.

Impact on Fiscal Reporting

• Maharashtra and Chhattisgarh reported significantly understated revenue deficits due to this misclassification.
• The Fiscal Responsibility and Budget Management (FRBM) Act's compliance is affected, distorting fiscal metrics like revenue surplus and fiscal deficit.

Conceptual and Definitional Challenges

• India’s cash-based accounting system, as opposed to accrual-based, leads to issues in recognizing economic activity.
• Capital expenditure definitions include transactions like loans for repaying existing loans, complicating true infrastructure investment reporting.

International Standards and Transparency

The International Monetary Fund (IMF) highlighted India's lack of consolidated fiscal accounts and overestimation in revenue and expenditure by 10-11% between FY16 and FY23, indicating a structural bias.

Consequences of Inaccurate Data

• Unreliable trend analysis and partial information for credit rating agencies.
• Hindered policy evaluation of fiscal support and development impact.
• Transparency and public participation scores are significantly low, affecting public trust and accountability.

Reforms and Way Forward

On November 11, the CAG used Article 150 to prescribe a harmonized accounting structure for both Union and state governments, mandating a uniform object-head classification by 2027-28.

Broader Reform Agenda

• Adopting international standards like the IMF's Government Finance Statistics Manual (GFSM).
• Publishing multi-year capital project projections and enhancing general government reporting.
• Improving transparency and accountability to strengthen public trust in fiscal reporting.

India's ability to reform its fiscal reporting hinges on rigorous application of new rules and harmonization efforts, moving towards a system where fiscal data is both reliable and meaningful.