States' deficits run deeper than their Budgets, show CAG reports

CAG audits reveal that several Indian states understated their fiscal gaps in 2024-25 due to accounting practices, off-budget borrowings, and unrecorded liabilities

Deficits reported by seven Indian states for 2024-25 understate the true gap in their finances, according to the Comptroller and Auditor General’s (CAG’s) State Finances Audit Reports tabled during the Monsoon Session of Parliament. 

In each report — covering Bihar, Chhattisgarh, Gujarat, Karnataka, Kerala, Maharashtra, and West Bengal — the CAG carries out a “post-audit” recalculation of the headline deficit. 

In every case, the revised figure is worse than the one originally reported by the state government. In Odisha, the auditor found that the reported revenue surplus was overstated by ₹721 crore. 

The headline deficit figures come from each state’s Finance Accounts for 2024-25, the official audited statement of receipts and expenditure presented to the legislature. These accounts are subsequently subjected to a post-audit review by the CAG. 

Chhattisgarh offers the starkest example. It reported a revenue deficit of ₹5,099 crore. After the auditor stripped out misclassified expenditure and off-Budget loan repayments wrongly booked as capital expenditure, the deficit doubled to ₹10,246 crore. 

Gujarat’s reported revenue surplus of ₹18,943 crore shrank to ₹7,014 crore once statutory dues and short transfers to designated funds were taken into account. Its fiscal deficit also increased by ₹12,383 crore to ₹61,348 crore. 

Similarly, Bihar’s reported revenue deficit of ₹357 crore expanded nearly sevenfold to ₹2,501 crore, while Maharashtra's fiscal deficit increased by more than ₹20,000 crore after the auditor added back ₹28,325 crore of off-Budget borrowings to the state’s debt. 

The audit reports point to several recurring accounting practices behind these revisions. The most common — also flagged in the CAG's audit of the 2023-24 Finance Accounts — is the classification of revenue expenditure as capital outlay, which inflates capital expenditure while reducing the reported revenue deficit. In this manner, Maharashtra misclassified ₹4,070 crore, Karnataka ₹2,021 crore, Chhattisgarh ₹1,235 crore, and West Bengal ₹1,032 crore. 

Another practice involves keeping debt off the books through borrowings by state-owned companies and special purpose vehicles that are ultimately serviced from the state budget. Kerala's report identified ₹39,230 crore of such off-budget borrowings excluded from its liability figures. 

The auditor also flagged the non-transfer of earmarked cesses — collected on fuel, labour, land and the environment — to dedicated welfare and development funds, with the money instead retained in the government's general bank account. Gujarat alone withheld ₹4,169 crore of motor spirit cess and ₹3,519 crore of labour cess. 

Several states also fell short on future obligations. They under-remitted employees' National Pension System (NPS) contributions — ₹3,278 crore in Maharashtra and ₹1,341 crore in Bihar — and parked unspent money in Personal Deposit accounts, creating the appearance that budget allocations had been utilised. Maharashtra had ₹20,993 crore and Odisha ₹11,418 crore lying in such accounts at the end of the year. 

“Undischarged liabilities, such as non-transfer of collected cess to designated bodies or short-remittances to the NPS, etc., can have significant long-term fiscal and governance implications," the West Bengal report notes. 

These unpaid obligations accumulate over time, creating hidden liabilities that distort the state's true financial position, the auditor warned. 

Finally, the reports flagged extensive use of the catch-all “800 – Other Expenditure” accounting head, which obscures the actual destination of spending. Kerala booked ₹7,164 crore, or 4.19 per cent of its total expenditure, under this head. Regular use of the head, the auditor noted, “renders the accounts opaque”.