CAG Report on States’ Macro-Fiscal Health – Explained

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• The CAG’s decadal analysis of States’ macro-fiscal health highlights uneven revenue sources, rising debt burdens, and the welfare paradox shaping fiscal sustainability across India.

Introduction

• India’s States collectively manage some of the largest public budgets in the world, often surpassing those of smaller countries in size. 
• The recently released decadal analysis of States’ macro-fiscal health by the Comptroller and Auditor General (CAG) offers a crucial snapshot of how reforms, growth, and crises such as the pandemic have shaped their fiscal trajectories. 
• While some States reported impressive revenue surpluses, others struggle under heavy debt burdens, revealing stark disparities in fiscal sustainability and policy choices.

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States’ Macro-Fiscal Landscape in India

• In the early 2000s, Indian States were burdened with chronic deficits. Reforms in tax collection, GST implementation, and high growth during the 2010s improved finances, with some States recording surpluses. 
• However, the pandemic reversed these gains, as shrinking revenues and soaring emergency expenditure pushed most States back into fiscal distress.
• States today present a mixed picture: while richer States like Maharashtra fund a large share of their expenditure internally, poorer States such as Arunachal Pradesh remain highly dependent on Union transfers. 
• This vertical imbalance in fiscal capacity underscores the unevenness of India’s federal fiscal architecture.

Uneven Revenue Sources

• The CAG report shows that States rely on highly variable revenue streams. For example:
  • Kerala’s lotteries contributed nearly Rs. 12,000 crore in 2022-23.
  • Odisha’s mining royalties made up 90% of its non-tax income.
  • Telangana raised nearly Rs. 9,800 crore through land sales.
• Such revenues are volatile and unsustainable: lotteries depend on sales, royalties on global commodity prices, and land cannot be sold repeatedly. 
• Even surplus-earning States like Uttar Pradesh generated only 42% of their receipts internally, leaning heavily on central transfers.

Rising Borrowings and Debt Burden

• The fiscal health of States is also reflected in their borrowing patterns:
  • Andhra Pradesh tripled its borrowings to Rs. 1.86 lakh crore by 2022-23, with debt reaching 35% of GSDP.
  • Bihar doubled its borrowings, pushing debt close to 39% of GSDP.
  • Kerala’s debt burden remained high at 37% of GSDP despite curbing borrowings post-pandemic.
  • Punjab continued its fiscal stress with liabilities touching 45% of GSDP.
  • In contrast, Odisha reduced borrowings, lowering debt to 15% of GSDP, the lowest in India.
• The pandemic was a turning point: while some States like Karnataka and Maharashtra cut back borrowings after 2021, others like Andhra Pradesh, Telangana, and Rajasthan kept expanding them, signalling divergent fiscal strategies.

The Welfare Paradox

• A striking theme of the CAG analysis is the welfare paradox. 
• Despite reporting surpluses or stable debt, many States underfund key welfare sectors such as education, health, and rural infrastructure. 
• Instead, reliance on off-budget loans, GST compensation arrears, and central transfers creates a façade of fiscal stability.
• Political populism adds another layer. Free power, farm waivers, and cash transfers defer costs into opaque mechanisms like guarantees and special-purpose vehicles. 

Implications for Fiscal Federalism

• The CAG findings highlight deeper structural issues in India’s fiscal federalism:
  • Dependence on volatile revenues limits the States’ capacity to plan long-term welfare.
  • Rising borrowings pose risks of debt overhang, especially in poorer and smaller States.
  • Vertical fiscal imbalance perpetuates reliance on the Centre, undermining financial autonomy.
  • Populist welfare policies erode fiscal discipline while failing to deliver sustainable outcomes.
• The analysis suggests that India’s States must prioritise capital expenditure over routine subsidies, diversify revenue sources, and strengthen fiscal transparency. 
• Without such reforms, India risks sustaining one of the largest welfare States in the world on one of the thinnest fiscal bases among middle-income economies.

Conclusion

• The CAG’s decadal review underscores the complexity of States’ macro-fiscal health. 
• While some States like Odisha demonstrate prudent fiscal management, others, such as Punjab and Kerala, remain vulnerable to debt traps and volatile revenues. 
• The welfare paradox, lavish spending amid weak revenues, reflects the tension between developmental needs and fiscal sustainability. 
• For India’s federal system to remain resilient, States must pursue balanced fiscal strategies that combine growth, welfare, and sustainability.

Source: TH