State finances: Revenue expenditure continues to dominate Budgets

Indicating a worrying situation for state finances, a new report has revealed that revenue expenditure continued to take up most of the Budget of states and fiscal pressures have mounted for a large number of them. The findings are a part of the Publication on State Finances 2024-25 that was released by the Comptroller and Auditor General of India on Tuesday.

The Publication, which provides a comparative overview of the finances of all 28 States over the 10-year period from 2015-16 to 2024-25 revealed that revenue expenditure continued to dominate budgets, averaging over 83% of the total spending. Capital expenditure increased in absolute terms but remained a relatively smaller share.

Social and economic services together accounted for about two-thirds of total expenditure, reflecting States’ focus on welfare and development. Further, committed expenditure and subsidies consistently absorbed more than half of revenue expenditure, reaching 53.31% in FY25, with subsidies growing particularly rapidly. Grants-in-aid also expanded significantly and continued to claim nearly one-third of revenue spending.

“Between 2015–16 and 2024-25, States’ aggregate expenditure rose sharply by 131%, broadly keeping pace with economic growth,” it said. It noted that over the period 2015–16 to 2024-25, despite a substantial increase in total expenditure, the expenditure structure remained largely unchanged, with salaries, pensions, interest payments, subsidies and grants together absorbing a substantial share, indicating fiscal rigidity.

More worryingly, the report revealed that as many as 18 states had fiscal deficits above the threshold of 3% that had been recommended by the 15th Finance Commission. Noting that Budget balance indicators are important markers of the fiscal health of the states, it said that during FY25, a total of 13 states were in revenue surplus, while 15 states were in revenue deficit.

The states that witnessed over 25%  increase in fiscal deficit in FY25 versus FY24 were Andhra Pradesh, Assam, Gujarat, Jharkhand, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Meghalaya, Mizoram, Nagaland, Odisha, Tripura and Uttarakhand.

Overall, the report noted that the fiscal position of states presents a mixed picture in FY2525. States’ Own Tax Revenue (SOTR) is the largest component of revenue receipts, rising to 50.13% in share from 49.55%.

Buoyancy, however, weakened in FY25 over FY24. The States’ share in Union taxes grew markedly, reflecting higher tax devolution under the Fourteenth and Fifteenth Finance Commissions, while reliance on grants in-aid and central assistance declined, it further noted.

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