Fiscal stress deepens across states as all 28 post deficits in FY25: CAG report

The Comptroller and Auditor General of India released the third edition of its Publication on State Finances 2024-25, covering audited accounts of all 28 sta...

What Happened

The Comptroller and Auditor General of India released the third edition of its Publication on State Finances 2024-25, covering audited accounts of all 28 states for the fiscal year ending March 31, 2025.
For the first time in the ten-year window covered by the report (2015-16 to 2024-25), every one of the 28 states recorded a fiscal deficit, underscoring a broad-based deterioration in state finances.
Fifteen states exceeded the benchmark fiscal deficit of 3 per cent of Gross State Domestic Product (GSDP) set by the Fifteenth Finance Commission; Meghalaya recorded the highest deficit at 8.69 per cent of GSDP, followed by Nagaland at 6.14 per cent and Sikkim at 5.59 per cent.
Combined liabilities of all states stood at Rs 90.51 lakh crore as of March 31, 2025, driven by a decade of expenditure growth outpacing revenue mobilisation.

Static Topic Bridges

Comptroller and Auditor General of India (CAG)

The CAG is a constitutional authority established under Articles 148 to 151 of the Constitution of India. Appointed by the President, the CAG can be removed only in the same manner and on the same grounds as a judge of the Supreme Court, ensuring institutional independence. The CAG audits the accounts of the Union government, all state governments, and government companies, and submits audit reports to the President (for Union accounts) or the Governor (for state accounts), who then cause these reports to be laid before Parliament or the state legislature respectively. The State Finances publication is a periodic compilation based on these audited accounts, making it the most authoritative source on state fiscal health.

Constitutional articles: 148 (appointment and removal), 149 (duties and powers), 150 (form of accounts), 151 (audit reports)
Removal process: Address by both Houses of Parliament on grounds of proved misbehaviour or incapacity — identical to Supreme Court judge removal
Types of audits: Compliance audit, performance audit, finance accounts, appropriation accounts
CAG K. Sanjay Murthy released the State Finances 2024-25 report in June 2026

Connection to this news: The findings carry institutional weight precisely because they are based on audited annual accounts, not budget estimates or provisional data — CAG reports are the final word on what states actually spent and earned.

Fiscal Deficit and Its Measurement

The fiscal deficit of a government is the excess of total expenditure over total receipts excluding borrowings. It measures the extent to which a government must borrow to finance its spending. For states, fiscal deficit is conventionally expressed as a percentage of Gross State Domestic Product (GSDP). The Fifteenth Finance Commission, which operates under Article 280 of the Constitution, set an indicative fiscal deficit ceiling of 3 per cent of GSDP for states for 2024-25, linked to the state-level Fiscal Responsibility and Budget Management (FRBM) frameworks.

Fiscal deficit = Total expenditure − Revenue receipts − Non-debt capital receipts
Distinct from revenue deficit (only current account imbalance) and primary deficit (excludes interest payments)
15 states exceeded the 3 per cent of GSDP benchmark in FY25; Meghalaya (8.69%), Nagaland (6.14%), Sikkim (5.59%) were the worst performers
States with substantial increases in fiscal deficit in FY25 vs FY24 include Andhra Pradesh, Assam, Gujarat, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Meghalaya, Mizoram, Nagaland, Odisha, Tripura and Uttarakhand

Connection to this news: The 3 per cent ceiling is not merely a convention — it is the threshold set by the Finance Commission against which state compliance is tracked and future borrowing permissions calibrated.

Fiscal Federalism in India

India's Constitution divides fiscal powers between the Centre and states. States have independent taxation powers (Schedule VII, List II) and receive transfers from the Centre through tax devolution (based on Finance Commission recommendations) and grants-in-aid. The Fifteenth Finance Commission recommended that 41 per cent of the Centre's divisible pool of taxes be devolved to states. Despite this sharing, structural asymmetries remain: states bear large expenditure responsibilities (education, health, agriculture, rural development) but depend partly on transfers whose quantum is determined at the Centre. Mounting state fiscal deficits reflect this structural tension.

States' combined revenue receipts: Rs 40.52 lakh crore in FY25
States' own tax revenue (SOTR): Rs 20.31 lakh crore — about 50 per cent of total revenue receipts
Combined expenditure: Rs 51.20 lakh crore (15.78 per cent of combined GSDP)
Total liabilities: Rs 90.51 lakh crore as of March 31, 2025

Connection to this news: The universality of fiscal deficits across all 28 states points to a structural challenge in the federal fiscal architecture, not simply poor management in individual states.

Key Facts & Data

All 28 states recorded fiscal deficits in FY 2024-25
15 states exceeded the 3 per cent of GSDP fiscal deficit benchmark set by the 15th Finance Commission
Meghalaya: 8.69% of GSDP (highest); Nagaland: 6.14%; Sikkim: 5.59%
Combined state liabilities as of March 31, 2025: Rs 90.51 lakh crore
Combined state expenditure in FY25: Rs 51.20 lakh crore (15.78% of combined GSDP)
Combined state revenue receipts: Rs 40.52 lakh crore
Revenue expenditure constituted approximately 80% of total state spending
Committed expenditure (salaries, pensions, interest payments): over 43% of combined revenue expenditure; highest in Nagaland (74%), lowest in Maharashtra (29%)
States' own tax revenue in FY25: Rs 20.31 lakh crore — roughly 50% of total revenue receipts
State GST contributed 43% of states' own tax revenues
CAG's State Finances publication is based on audited annual accounts, making it distinct from RBI or budget estimate sources