CAG Report on the Fiscal Health of States | 23 Sep 2025

Source:IE

Why in News?

The Comptroller and Auditor General of India (CAG) released its first decadal analysis on the fiscal health of 28 Indian states, showing that their public debt (internal borrowings plus loans from the Centre) has tripled in 10 years, reaching Rs 59.6 lakh crore in FY 2022-23, raising concerns about fiscal sustainability.

What are the Key Findings of the CAG Report on States’ Fiscal Health?

• Debt Growth in a Decade: States’ total public debt increased 3.39 times from Rs 17.57 lakh crore in 2013-14 to Rs 59.60 lakh crore in 2022-23. 
  • Debt as a share of Gross State Domestic Product (GSDP) (value of all finished goods and services produced within a state’s geographical boundaries) rose from 16.66% to 22.96%, showing a heavier fiscal burden.
  • States’ debt stood at 22.17% of India’s country’s Gross Domestic Product (GDP) in 2022-23.
• State-wise Variations: Punjab (40.35%), Nagaland (37.15%), and West Bengal (33.70%) had the highest debt ratios, while Odisha (8.45%), Maharashtra (14.64%), and Gujarat (16.37%) had the lowest.
• Debt vs revenue capacity: On average, states’ debt has been about 150% of their revenue receipts, peaking at 191% in 2020-21 during Covid-19.
• Sources of borrowing: Loans raised from open market through securities, treasury bills, bonds, banks, Reserve Bank of India (RBI’s) Ways and Means Advances, and institutions like Life Insurance Corporation of India (LIC) and National Bank for Agriculture and Rural Development (NABARD).
• Centre’s Role: Loans from the Union government increased due to GST compensation shortfall and special assistance for capital expenditure.
• Golden rule violations: The Golden Rule of Fiscal Policy states governments should borrow only for capital investment, not for current spending. 
  • However, at least 11 states used borrowings to cover day-to-day expenditure rather than capital investment,  in Andhra Pradesh and Punjab, less than 25% of borrowings went into capital projects.

What are the Reasons for High State Debt in India?

• Reduced Fiscal Autonomy Post-GST: The introduction of Goods and Services Tax (GST) in 2017 centralized tax collection, leaving states with fewer avenues to generate revenue independently.
  • Moreover, the decline in their share of tax revenue due to new central cesses and surcharges further curtails their fiscal space.
• Fiscal Imbalance: States collect less than a third of the total revenues but are responsible for nearly two-thirds of the public expenditure. 
  • This significant revenue-expenditure mismatch forces states to borrow to meet their spending needs.
• High Reliance on Market Borrowings: Over time, states have increasingly turned to market borrowings, which account for a larger portion of state debt. 
  • Market borrowings come at a higher cost compared to other debt instruments, leading to an increased financial burden on states.
• Contingent Liabilities: State governments often undertake projects that involve financial guarantees (e.g., infrastructure projects), creating potential future financial obligations, known as contingent liabilities. These liabilities pose risks to fiscal health.
• Higher Interest Rates: States face relatively higher borrowing costs compared to the central government, which increases the total debt servicing burden.
• Historical Debt Accumulation: States with a history of high debt levels are forced to borrow more to service existing debt, creating a debt trap that’s difficult to escape.

What are the Implications of Rising State Public Debt in India?

• Threat to Fiscal Federalism: Rising debt limits fiscal autonomy of States and increases central control over state finances, undermining the federal structure.
• Fiscal Sustainability Risks: High debt servicing costs limit funds for developmental spending, potentially leading to a debt trap where states borrow more to repay existing debt.
• Impact on Economic Growth: States may have reduced capacity for investment in critical sectors like infrastructure, slowing long-term growth.
• Inflation and Interest Rate Risks: Higher borrowing costs and inflationary pressure can destabilize the economy and increase fiscal stress.
• Regional Disparities: States with higher debt-to-GDP ratios may face increased fiscal distress, creating greater regional inequalities in fiscal health.
• Impact on Social Welfare: States may cut back on welfare programs and public services, negatively affecting vulnerable populations.

How can States Reduce Debt Burden while Maintaining Fiscal Health?

• Enhancing Revenue Generation: Enhance tax collection efficiency by expanding the tax base, and broadening tax scopes through economic formalization. 
  • States can explore innovative revenue sources like mining royalties, tourism, and public asset monetization.
• Rationalizing Expenditures: States should prioritize capital expenditure for long-term investments, control discretionary spending, and rationalize inefficient welfare programs.
• Debt Restructuring: States should refinance high-interest debt, seek lower-cost debt sources (e.g., National Small Savings Fund (NSSF), Green Bonds or Infrastructure Bonds), and set debt ceilings to keep debt-to-GDP ratios within limits, as per the Fiscal Responsibility and Budget Management (FRBM) Act, 2003.
• Promoting Investment: Focus on Public-Private Partnerships (PPPs) and foreign direct investment (FDI) in key sectors such as infrastructure, technology, and renewable energy. 
  • This can reduce the burden on state finances while leveraging private sector expertise.
• Create Contingency Funds: Set up rainy day funds or contingency funds to cover unforeseen fiscal needs, helping to avoid excessive borrowing during times of economic shocks or natural disasters.
• Enhancing Central-State Fiscal Cooperation : Increase states' share of central revenues as per the Finance Commission, and ensure timely  GST compensation to reduce short-term borrowing needs.
• Improving Public Financial Management: Implement performance-based budgeting with the aid of Fiscal Health Index (FHI) and link expenditure to outcomes, and use technology to streamline procurement and reduce inefficiencies.
• Social Safety Nets: Strengthen social safety nets that protect the most vulnerable without placing excessive strain on state budgets.