NEW DELHI: Eighteen of India’s 28 states overshot the fiscal deficit ceiling of 3 per cent of gross state domestic product (GSDP) in FY25, the third annual review of state finances released by the Comptroller and Auditor General (CAG) on Tuesday showed, noting that the deterioration is comparable only to the increase seen during the Covid year of FY21.
According to the report, Meghalaya recorded the steepest fiscal deficit at 8.69 per cent of GSDP, followed by Nagaland at 6.14 per cent and Sikkim at 5.59 per cent. Moreover, 14 states, including Gujarat, Karnataka, Kerala, Maharashtra and Odisha, recorded an increase of more than 25 per cent in fiscal deficit in FY25 over FY24 in value terms.
Additionally, the number of states with a revenue surplus declined to 13 in FY25 from 16 in FY24. Bihar, Mizoram and Telangana moved from revenue surplus to revenue deficit in FY25.
The Covid pandemic placed severe fiscal strain on state governments, characterised by sharp declines in revenue and heightened expenditure commitments.
“Fiscal responsibility indicators for the period 2015-16 to 2024-25 reveal that all States together remained in revenue and fiscal deficit. Revenue deficit rose sharply in FY21, the Covid pandemic period. There has been a substantial increase in fiscal deficit in FY21 and FY25,” the report said.
Total liabilities of states as on March 31, 2025, showed wide variation, ranging from 15.79 per cent of GSDP in the case of Odisha to 52.84 per cent in the case of Arunachal Pradesh. During the period 2015-16 to 2024-25, total liabilities of all states combined as a percentage of GSDP increased from 24.19 per cent to 27.89 per cent.
“Considering the indicative debt ceiling target of 32.8 per cent of GSDP, set by the Fifteenth Finance Commission for states’ fiscal consolidation path by FY25, 13 states had total liabilities exceeding this ceiling,” the CAG said.
DK Srivastava, chief policy advisor, EY India, said the combined liabilities of all states, including public debt and public account liabilities, translate to 28.5 per cent of nominal gross domestic product (GDP) based on the newly released 2022-23 base-year series. “In contrast, total liabilities of the Government of India, net of on-lending to the states, evaluated at market exchange rates, are estimated at 55.4 per cent of GDP in 2024-25. If these numbers are evaluated against the FRBM 2018 norms, both levels of government exceed their corresponding target levels of 20 per cent for the states and 40 per cent for the GoI,” he added.
Srivastava said if debt levels are evaluated against the sustainable norms prescribed by the Twelfth Finance Commission of 28 per cent of GDP each, the position of states considered as a group appears to be much better, while the GoI has yet to recover from post-Covid stress.
States’ own tax revenue (SOTR) is the largest component of revenue receipts, rising significantly in absolute terms and increasing its share from about 49.55 per cent to nearly 50.13 per cent, although its buoyancy weakened in FY25 compared with FY24. The states’ share in Union taxes grew markedly, reflecting higher tax devolution under the Fourteenth and Fifteenth Finance Commissions, while reliance on grants-in-aid and central assistance declined. Non-tax revenue increased in value but continued to contribute a modest share of total receipts. On the capital side, public debt receipts grew sharply over the period and constituted almost the entire capital receipts of the states in FY25.
Capital expenditure accounted for 16.59 per cent of total state spending in FY25. “Over the period 2015-16 to 2024-25, despite a substantial increase in total expenditure, the expenditure structure remained largely unchanged, with salaries, pensions, interest payments, subsidies and grants together absorbing a substantial share, indicating fiscal rigidity,” the supreme audit institution highlighted.
Source: Business Standard
