The Comptroller and Auditor General’s latest report on state finances should raise concerns throughout the nation. It lays bare a fiscal scenario where more than 80 percent of states’ revenue expenditure is locked in salaries, pensions, interest payments, subsidies, and grants-in-aid. In 2022-23, the committed expenditure alone amounted to over Rs 15.6 lakh crore, up from Rs 6.26 lakh crore in 2013-14. Add to this subsidies of Rs 3.09 lakh crore and grants-in-aid worth Rs 11.26 lakh crore, and the total reaches nearly Rs 30 lakh crore. The consequences are stark: there is little room left for productive capital expenditure or development work.
This pattern reveals a disturbing trajectory. Over a decade, committed expenditure has increased by 2.49 times, subsidies by 3.21 times, and overall revenue expenditure by 2.66 times. These figures are not merely statistics; they reflect the narrowing fiscal space of states. For every rupee spent, barely a few rupees remain available for infrastructure, health, education, or social investment after meeting mandatory obligations. When essential development spending is squeezed out to service past commitments, long-term growth prospects are imperilled.
A large part of this crisis is political. Competitive populism has ensured that most political parties, regardless of ideology, promise freebies before elections. Loan waivers, subsidised power, free water, cash transfers, and a host of giveaways have become the norm. The irony is unmistakable-states already strapped for funds are forced to borrow more, not for creating assets or building capacity, but to finance consumption and unproductive expenditure. It is a vicious cycle where loans fund salaries, pensions, and subsidies, while debt servicing demands more borrowing.
The report also underscores how debt servicing pressures are mounting. In nine states, interest payments now exceed pension expenditure, pointing to the heavy burden of rising liabilities. This indicates that revenue streams are increasingly being diverted just to service old debt. When interest itself becomes one of the largest heads of spending, alarm bells cannot be ignored.
The fiscal imbalance has a direct bearing on social sectors. Budgetary allocations to health, education, infrastructure, and innovation are being pruned as states struggle to meet wage and pension bills. This is short-sighted. The outcome is visible: underfunded hospitals, delayed infrastructure projects, and inadequate educational support.
Corrective measures cannot be postponed. Subsidies must be rationalised. Only targeted subsidies that reach the genuinely needy should be allowed. Further, subsidies must be time-bound with periodic reviews, instead of becoming permanent entitlements. States must have the political courage to say no to wasteful doles that serve only electoral optics. Simultaneously, grants-in-aid to loss-making public sector undertakings need urgent scrutiny. Governments cannot continue to pour money into corporations that have no roadmap for profitability. Such bailouts are fiscally irresponsible and perpetuate inefficiency. A clear sunset clause on aid to such entities, coupled with restructuring or privatisation, is essential. The bloated salary and pension bills must be addressed. In the digital age, with automation and e-governance improving efficiency, the need for ever-expanding manpower is questionable. Rationalising staff strength, pruning redundant posts, and leveraging technology can help reduce the burden without compromising service delivery. Simultaneously, states need to explore pension reforms, including moving more employees to contributory pension schemes, to prevent unsustainable outflows. States have to strengthen revenue mobilisation. Dependence on central transfers alone cannot sustain growing expenditure. Enhancing tax efficiency, plugging leakages, and expanding the tax base through better compliance and digital monitoring should be priorities. Every rupee spent must be matched by a credible earning, not borrowed recklessly.
The political class must also rethink its obsession with populist promises. Development cannot be mortgaged for short-term electoral gains. It is time to initiate a national-level debate, perhaps through the NITI Aayog, on a fiscal responsibility framework that caps unproductive spending. The CAG’s findings are not a routine statistical exercise but a wake-up call. India’s growth story cannot be sustained if its states, the principal drivers of development, remain fiscally handicapped. Only by cutting waste, enforcing discipline, and prioritising long-term development can states reclaim fiscal space and chart a path to sustainable progress.
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