The Comptroller & Auditor General of India (CAG) on Monday said many states are facing fiscal sustainability risks and financial indiscipline due to off-budget borrowings and misclassification of revenue expenditure as capital expenditure.

Speaking at the Annual Accountant General’s Conclave, CAG Girish Chandra Murmu said states must reduce the fiscal deficit, remove the revenue deficit and keep outstanding debt at an acceptable level. To improve fiscal management, both the Centre and many states have been implementing the Fiscal Responsibility and Budget Management (FRBM) Act in recent years.

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“We, however, continue to notice fiscal sustainability risks and financial indiscipline in many states due to off-budget borrowings, misclassification of revenue expenditure as capital expenditure and because state guarantees are not getting captured in finance accounting.

These factors make qualitative and timely preparation of accounts by the CAG one of the most important responsibilities to tackle these challenges,” Murmu said.

He said that the states must meet their capex, including loans and advances, from their own sources of revenue, or at the least confine the net debt to its capital expenditure. “While we understand the importance of subsidies to help the underprivileged, it is essential to transparently account for such subsidies and we require to distinguish between justifiable subsidies from freebies, which are not fiscally responsible.”

Murmu also said that states must initiate measures to earn adequate returns on their investments and recover their cost of borrowed funds without resorting to implicit subsidies.

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After the Centre’s clampdown on states for resorting to fiscal indiscipline, states’ off-budget borrowings likely fell 72% on year to Rs 18,498 crore in FY23. The off-budget borrowing declared by the states through their companies, special purpose vehicles (SPVs) and other equivalent instruments, was estimated at Rs 66,640 crore in FY22.

Article 150 of the Constitution mandates that the accounts of the Union and of the states shall be kept in a manner as prescribed by the President of India on the advice of the Comptroller and Auditor General of India.

FE had reported earlier that the Centre had cut around Rs 41,000 crore from the states’ net borrowing ceiling for FY23 for resorting to off-balance sheet loans in FY22. The decision is part of a tightening of norms to discourage fiscal indiscipline by states, many of which resort to debt through parastatal bodies to fund government schemes and capex.