New Delhi: India’s state finances have entered a phase of broad-based fiscal stress, with all 28 states posting fiscal deficits in 2024-25 even as their expenditure and debt burdens climbed to record levels. The latest assessment by the Comptroller and Auditor General (CAG) suggests that stronger tax collections have not been sufficient to offset mounting expenditure commitments, leaving states grappling with tighter fiscal space and rising liabilities.
The combined liabilities of states rose to Rs 90.50 lakh crore as of March 31, 2025, while aggregate budgetary expenditure touched Rs 51.20 lakh crore, equivalent to 15.78% of their combined Gross State Domestic Product (GSDP). Fifteen states reported fiscal deficits exceeding the 3% of GSDP threshold, underlining the widening pressure on public finances despite a sustained recovery in economic activity.
The findings are contained in the CAG’s Publication on State Finances 2024-25, a decadal review of audited state accounts covering the period from 2015-16 to 2024-25. Releasing the report, Comptroller and Auditor General of India K Sanjay Murthy said, “The publication has emerged as an important reference on the fiscal health and financial management of states.” He added that the detailed statistics “would provide governments, researchers, policymakers and citizens, evidence-based insights into state finances, support informed fiscal decision-making, and strengthen fiscal governance and accountability.”
The report indicates that while states have increased spending to support welfare programmes and development initiatives, the underlying structure of expenditure has become increasingly rigid, limiting their ability to respond to future economic shocks.
Revenue Gains Constrained
States have made significant progress in strengthening their own revenue base over the past decade. Combined revenue receipts stood at Rs 40.52 lakh crore in 2024-25, with states’ own tax revenue (SOTR) accounting for 50.13% of the total. State GST emerged as the dominant source, contributing more than 43% of own tax collections and reflecting the growing importance of consumption-based taxation in state finances.
SOTR more than doubled from about Rs 8.40 lakh crore in 2015-16 to Rs 20.31 lakh crore in 2024-25. The report also noted that average annual tax growth improved during the post-GST period compared with the years preceding the tax reform, even though tax buoyancy weakened in FY25 from the previous year.
At the same time, the dependence on transfers from the Centre has gradually declined. The share of grants-in-aid and central assistance in total state revenues has moderated over the decade, increasing the importance of states’ own revenue mobilisation efforts.
Yet stronger revenues have not translated into healthier fiscal balances. According to Shefali Srivastava Andaleeb, Director General (GA-I), CAG, “In the financial year 2024-25, all the 28 States were in fiscal deficit, of which 15 States had fiscal deficits above 3% of GSDP. We have analysed these fiscal responsibility indicators state-wise in the publication.”
The report also highlights liquidity pressures beneath the headline numbers. Fifteen states recorded revenue surpluses while 13 remained in revenue deficit during FY25, but some revenue-surplus states still relied on ‘ways and means’ advances, pointing to persistent cash management challenges.
Spending Rigidities Intensify
The more pressing concern for state finances lies on the expenditure side. Aggregate expenditure rose 131% over the decade, from Rs 22.18 lakh crore in 2015-16 to Rs 51.20 lakh crore in 2024-25, broadly keeping pace with economic growth. However, the composition of spending has changed little, with committed liabilities continuing to dominate budgets.
Revenue expenditure accounted for nearly 80% of total spending, while salaries, pensions and interest payments remained major expenditure heads. The CAG noted that committed expenditure exceeded 80% of the combined total expenditure of the 28 states, with wide disparities ranging from 74% in Nagaland to 29% in Maharashtra.
Highlighting the growing burden of obligatory spending, Andaleeb said, “Committed expenditure, subsidies and grants-in-aid salary expenditure together accounted for more than 61% of revenue expenditure. Subsidies alone accounted for over 10% of revenue expenditure in 2024-25.”
The report estimates that committed expenditure and subsidies together absorbed 53.31% of revenue expenditure in FY25, reflecting a steady expansion of recurring obligations that leave limited room for discretionary spending. Eight major expenditure categories, including grants-in-aid, salaries, pensions, interest payments, subsidies and major works, accounted for nearly 78.46% of total state expenditure and 12.38% of combined GSDP.
Sectoral allocations suggest that states have sought to balance welfare and growth priorities. Social and economic services together accounted for around two-thirds of total expenditure, while the economic sector absorbed nearly 63% of total capital outlay, underscoring the emphasis on infrastructure and productive investment. Education remained the single largest functional expenditure head, followed by social welfare and energy.
The CAG concluded that despite substantial growth in spending, “the expenditure structure remained largely unchanged, with salaries, pensions, interest payments, subsidies and grants together absorbing a substantial share, indicating fiscal rigidity”.
The FY25 fiscal picture points to a paradox confronting India’s states. Revenue mobilisation has strengthened materially since the introduction of GST, but rising committed expenditure, expanding subsidy bills and growing debt have outpaced those gains. With every state in fiscal deficit and liabilities approaching Rs 91 lakh crore, the challenge for state governments is shifting from raising revenues to creating the fiscal flexibility needed to sustain growth, fund welfare commitments and preserve long-term debt sustainability.
(Cover photo by Aakash Dhage on Unsplash)