Improving fiscal credibility: States need a transparent reporting framework

The Comptroller and Auditor General’s (CAG’s) latest audit reports on state finances have exposed gaps between headline Budget numbers and the true fiscal position of several states. The auditor found that the reported revenue and fiscal deficits of states, including Bihar, Chhattisgarh, Gujarat, Kerala, Karnataka, West Bengal and Maharashtra, understated deficits once off-Budget borrowings, misclassification of expenditure, delayed transfers of pension contributions, and other unpaid obligations were taken into account. These observations should not be viewed as isolated accounting irregularities. 

The most significant concern is the increasing reliance on off-Budget borrowing by states. These are loans raised by state-owned enterprises, special purpose vehicles, and other government-controlled entities, with debt servicing ultimately borne by the state through grants, guarantees or dedicated revenue streams. Such borrowing is often used to finance infrastructure, subsidies or loss-making public utilities without immediately reflecting the liabilities on the government’s own books, weakening the credibility of headline fiscal indicators. The World Bank, in a recent report prepared for the Sixteenth Finance Commission, found that four states, namely Andhra Pradesh, Telangana, Kerala and Tamil Nadu, relied heavily on off-Budget borrowing between 2021 and 2023, amounting to 0.6-4 per cent of their gross state domestic product. The real issue here is the absence of transparent and uniform disclosure by state governments. Successive Finance Commissions and the Reserve Bank of India (RBI) have repeatedly flagged this concern. 

The RBI has argued that fiscal-responsibility laws should evolve from merely monitoring deficit numbers to assessing broader fiscal risks. It recommends a risk-based fiscal framework under which governments regularly disclose off-Budget borrowing, guarantees, contingent liabilities and pension obligations through comprehensive fiscal risk statements. The CAG’s findings also expose weaknesses in expenditure classification. Several states booked routine revenue expenditure as capital outlay, thereby lowering the reported revenue deficit while inflating capital expenditure. Misclassification not only distorts fiscal indicators but also creates a misleading impression of the quality of public expenditure. Equally troubling is the continued use of the residual accounting category “Minor Head 800 – Other Expenditure”. The World Bank report notes that grants used for servicing off-Budget loans are often parked under this head, obscuring their true purpose. The CAG similarly observed large amounts were booked under this head, making it difficult for legislatures, investors and citizens to understand where public money was being spent.

Although common government-accounting rules already exist, disclosure practices remain uneven and often inadequate. A standardised fiscal reporting framework should require every state to uniformly disclose off-Budget borrowings, guarantees, contingent liabilities, escrowed revenues, unpaid statutory obligations and pension liabilities, alongside the Budget. As the RBI has argued, states should also adopt a medium-term expenditure framework to better link policymaking with budgeting through multiyear expenditure planning, while regularly publishing fiscal-risk statements. Fiscal responsibility cannot be judged solely by whether deficit targets are met in a given year; it ultimately depends on whether public accounts present a complete picture of governments’ true financial obligations.