Why India's state accounts don't add up

Misclassification is rife, affecting compliance under FRBM Act, and distorting revenue surplus, fiscal deficit and debt ratios. IMF doesn't like it. Now, CAG is set to clamp down on the bad practice

- HIMANSHI BHARDWAJ

In 2023-24, Odisha proudly reported capital expenditure of ₹43,273 crore — a number that, on the surface, signalled a state investing aggressively in infrastructure.

But once the Comptroller and Auditor General of India (CAG) opened the books, the neat picture unravelled. Nearly ₹4,565 crore of what the state had declared as capital spending turned out to be revenue in nature: operation and maintenance costs, routine repairs, and, most significantly, funds transferred to non-government entities for community assets — from wedding halls to temple halls and sports equipment for youth groups.

After audit correction, Odisha’s capex fell to 38,708.75 crore and its capex-to-GSDP (Gross State Domestic Product) ratio dropped from 5.07 per cent to 4.54 per cent. The revenue surplus too had been overstated by the same amount.

For seasoned observers of state finances, the Odisha example is not an outlier. It is symptomatic of a deeper structural problem: India does not have a coherent, comparable standardised system of state accounting. What should allow clean interstate comparisons — capex, revenue deficits, development spending — has instead become a patchwork of inconsistent classifications, outdated definitions and accounting choices that vary not by economics but by geography.

Across 10 states in FY24, auditors identified ₹10,579.19 crore of expenditure that had been misclassified. Some states shifted routine spending into capital accounts, others pushed grants into capex even when the rules explicitly barred it, and several buried operational expenditure under object heads that concealed its true nature. The fiscal picture these states present to markets, rating agencies, policymakers and citizens is not the one that exists on the ground.

Hidden in plain sight