India's States Face a Ticking Fiscal Time Bomb: CAG Report Reveals Soaring Salary, Pension, and Interest Burdens

A recent report from the Comptroller and Auditor General (CAG) of India has cast a concerning shadow over the financial health of the nation's states, revealing a dramatic 2.5-fold surge in expenditure on salaries, pensions, and interest payments over the last decade. This alarming trend, documented between 2011-12 and 2021-22 for 28 states, highlights a looming fiscal challenge that demands urgent attention.

The numbers speak volumes: the combined burden of these three critical components soared from a staggering Rs 9.3 lakh crore in 2011-12 to an eye-watering Rs 22.8 lakh crore by 2021-22.

This exponential rise indicates a significant and growing strain on state coffers, raising serious questions about the sustainability of current financial practices and future economic stability.

Delving deeper into the figures, the report reveals that salaries alone accounted for a massive Rs 10.4 lakh crore in 2021-22.

Pensions added another substantial Rs 5.5 lakh crore to the expenditure, while interest payments on existing debts consumed a colossal Rs 6.9 lakh crore. Collectively, these three items form the lion's share of states' revenue expenditure, consistently hovering between a worrying 64% and 70% during the review period.

This disproportionate allocation means less flexibility and fewer resources for crucial development projects.

The CAG's findings serve as a stark warning: if left unaddressed, these escalating expenditures could lead to an unsustainable financial burden for states. The report specifically flags the reintroduction of the Old Pension Scheme (OPS) by several states as a potential catalyst for further exacerbating this problem, threatening to add significant future liabilities.

While the combined fiscal deficit of states, at Rs 8.3 lakh crore in 2021-22 (3.8% of GSDP), remained within the 4% limit, the debt-to-GSDP ratio, at 29.5%, slightly overshot the target of 20%.

These indicators, coupled with the rising non-developmental expenditure, paint a picture of constrained fiscal space. The report underscores a concerning shift where the share of development expenditure has been on a declining trajectory, while non-development expenditure, largely driven by these three categories, continues its upward climb.

This comprehensive analysis by the CAG provides a critical perspective on the intricate web of state finances.

It's a clarion call for robust fiscal management, innovative policy reforms, and a renewed focus on sustainable economic growth to navigate these financial headwinds and secure a stable future for India's states.