Last Updated on September 19, 2025 7:37 pm by BIZNAMA NEWS
By R. Suryamurthy
India’s states closed FY23 with widening fiscal deficits, exposing weaknesses in fiscal discipline and increasing dependence on borrowings to cover day-to-day expenses. The latest State Finances 2022–23 Report from the Comptroller and Auditor General (CAG) highlights that nearly half of India’s states breached the 3.5% of GSDP deficit ceiling set by the 15th Finance Commission.
Deficit Divergence Across States
All 28 states recorded fiscal deficits in FY23, but the extent varied widely. Himachal Pradesh (-6.46%), Assam (-6.3%), Bihar (-6%), Meghalaya (-6%), Punjab (-4.9%) and Sikkim (-4.5%) registered the steepest slippages, far above the prudential limit. These states are burdened by heavy salary, pension and debt servicing costs, leaving little fiscal room for capital spending.
By contrast, Gujarat (-0.76%), Maharashtra (-1.1%), Karnataka (-1.6%) and Odisha (-2.1%) managed to keep deficits well under control, benefiting from stronger tax revenues and tighter expenditure management.
Revenue Gaps and Borrowing Strain
The report underlines that 12 states slipped into revenue deficits despite receiving Finance Commission transfers. States such as Andhra Pradesh, Kerala, Punjab, Rajasthan, Tamil Nadu and West Bengal are borrowing not for capital creation but to meet recurring expenses. Punjab’s case is particularly concerning, with a revenue deficit of 3.8% of GSDP.
This violates the “golden rule” of public finance, which dictates that borrowing should be used to finance capital assets rather than day-to-day costs. In Andhra Pradesh, only 17% of fresh borrowings were used for capital expenditure, with the rest diverted to plug revenue shortfalls.
Debt Burden and Structural Challenges
By end-March 2023, overall state liabilities stood at 28% of GSDP, within the national ceiling of 33.3%. Yet, 11 states — including Punjab, Himachal Pradesh, Bihar, West Bengal, Kerala and Rajasthan — overshot this limit. Punjab’s liabilities were the highest at over 45% of GSDP, underlining deep structural imbalances.
Meanwhile, committed expenditure (salaries, pensions and interest payments) consumed nearly 44% of states’ revenue, with subsidies adding another 9%. Even states with buoyant GST collections are finding little fiscal room for capital investments.
Policy Implications
Economists caution that persistent high deficits, particularly in consumption-driven states, risk crowding out capital expenditure and saddling future generations with debt. With the 16th Finance Commission scheduled to review state finances in 2026, policymakers face the critical challenge of balancing fiscal consolidation with states’ demand for spending flexibility.
