States Spend Beyond Their Means, Finds CAG Report

This was one of the key findings of the State Finances Report recently published by the Comptroller and Auditor General (CAG). The document was CAG's first decadal publication on State Finances (from 2013-14 to 2022-23), providing an in-depth overview of the finances of 28 states. 

The report details the public healthcare systems of the states, in addition to educational and civic infrastructure.  

Committed Expenditure

It also gives a breakdown of the committed expenditure of states. Committed expenditure refers to the unavoidable future financial obligations of a government. This includes salaries, wages, pensions, and interest payments. When the committed expenditure of a state is high, it indicates that the government would not be able to redirect its revenue for other purposes.  

The committed expenditure of Himachal Pradesh, for instance, accounts for 66.81 percent of its total revenue, while Kerala’s committed expenditure stands at 62.89 per cent, Uttarakhand's at 58.94 per cent, Punjab's at 57.81 per cent, Haryana's at 55.27 per cent, and Tamil Nadu's at 50.97 per cent.  

It is also noteworthy that Punjab, as per the report, spends 16.93 per cent of its revenue on subsidies, as a result of which it has to seek Central assistance for additional funds. 

The report also points to why the Election Commission (EC) of India should make it mandatory for political parties to reveal the source of revenue while making promises to the electorate in the run-up to polls. 

According to the report, West Bengal is the only state that did not submit the required details to the CAG or table its CAG report in the state assembly. Figures for West Bengal’s financial years 2021-22 and 2022-23 were sourced from the state’s Annual Financial Statement and Budget documents, as the finance accounts for these years were not presented to the state legislature.

A Closer Look At How States Fare

States’ Own Tax Revenue (SOTR) and States’ Non-Tax Revenue (SNTR): Some states have large bases for both SOTR and SNTR. For example, in FY 2022-23, Haryana, Telangana, Maharashtra, and Gujarat saw 70 to 80 per cent of their revenue coming from these sources, while Karnataka, Tamil Nadu, Goa, and Kerala saw about 60 to 70 per cent.

Meanwhile, Odisha, Andhra Pradesh, Rajasthan, Punjab, and Chhattisgarh registered revenue from these sources at 50 to 60 per cent, and revenue for states such as Jharkhand, Madhya Pradesh, Uttar Pradesh, West Bengal, and Uttarakhand stood at 40 to 50 per cent. In contrast, the revenue receipts from SOTR and SNTR in the North-East, Bihar, and Himachal Pradesh were below 40 per cent.

Revenue Expenditure: The report finds that for the ten years from 2013-14 to 2022-23, revenue expenditure accounted for 80 to 87 per cent of the total expenditure, averaging about 13 to 15 per cent of the combined Gross State Domestic Product (GSDP). In FY 2022-23, this figure rose to 84.73 per cent of total expenditure and 13.85 per cent of the combined GSDP.

A significant portion of this expenditure comprises committed expenditure. 

Interestingly, in nine states, interest payments were higher than the pension expenditure, indicating higher debt servicing requirements. In the previous nine-year period (2013-14 to 2021-22), interest payments were consistently the second-largest component of committed expenditure after salaries.

Pension Expenditure: The report highlights why the demand for the re-implementation of the Old Pension Schemes (OPS) was financially imprudent. In FY 2022-23, five states (Himachal Pradesh, Nagaland, Kerala, Manipur, and Mizoram) spent 15 per cent or more of their total expenditure on pensions. Fourteen other states, including Punjab, Assam, and Uttar Pradesh, allocated between 10 to 15 per cent for pensions. 

The report raises an important question: do states have the financial capacity to absorb such large expenditures, both from their SOTR and within the total revenue receipts?

(The writer is a senior, Delhi-based journalist with over three decades of experience. Views are personal)