Audit Findings on State Finances
The latest audit reports by the Comptroller and Auditor General (CAG) reveal discrepancies between headline Budget numbers and the actual fiscal conditions of several Indian states.
Key Issues Identified
- States like Bihar, Chhattisgarh, Gujarat, Kerala, Karnataka, West Bengal, and Maharashtra have understated revenue and fiscal deficits.
- This underreporting is due to:
- Off-Budget borrowings.
- Misclassification of expenditure.
- Delayed pension contributions.
- Other unpaid obligations.
Concerns with Off-Budget Borrowing
- States increasingly rely on loans raised by state-owned entities.
- Debt servicing for these loans is indirectly borne by the state through:
- Grants
- Guarantees
- Dedicated revenue streams
- This practice distorts fiscal indicators and lacks transparency.
- According to the World Bank, Andhra Pradesh, Telangana, Kerala, and Tamil Nadu used off-Budget borrowing heavily between 2021 and 2023, comprising 0.6-4% of their GDP.
Recommendations for Improvement
- The Reserve Bank of India (RBI) suggests evolving fiscal-responsibility laws to address broader fiscal risks.
- A risk-based fiscal framework should be adopted, including:
- Regular disclosures of off-Budget borrowing.
- Guarantees, contingent liabilities, and pension obligations.
- Comprehensive fiscal risk statements.
Issues with Expenditure Classification
- Routine revenue expenditures are being misclassified as capital outlay.
- This misrepresentation affects fiscal indicators and public expenditure quality.
- The use of "Minor Head 800 – Other Expenditure" obscures the true purpose of grants used for servicing off-Budget loans.
Need for Standardized Fiscal Reporting
- Existing government accounting rules require improved and uniform disclosure practices.
- A standardized fiscal reporting framework should include:
- Off-Budget borrowings
- Guarantees and contingent liabilities
- Escrowed revenues
- Unpaid statutory obligations
- Pension liabilities
- States should adopt a medium-term expenditure framework for better policy-budget linkages.
- Regular publication of fiscal-risk statements is essential.
- Fiscal responsibility should encompass a complete picture of government financial obligations beyond meeting annual deficit targets.
