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Economics June 16, 2026 4 min read Daily brief · #7 of 25

CAG asks states to disclose off-budget borrowings in A/Cs

The Comptroller and Auditor General (CAG) of India released its State Finances 2024-25 report in June 2026, revealing that all 28 states posted fiscal defici...

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What Happened

  • The Comptroller and Auditor General (CAG) of India released its State Finances 2024-25 report in June 2026, revealing that all 28 states posted fiscal deficits in FY25 — a first since the post-pandemic recovery period.
  • Combined outstanding liabilities of states reached ₹90.51 lakh crore as of March 31, 2025, reflecting a steady accumulation of debt including off-budget obligations routed through Special Purpose Vehicles (SPVs) and state-owned entities.
  • The CAG urged states to fully disclose off-budget borrowings in their financial accounts and recommended reducing these hidden liabilities over time to restore fiscal transparency and comply with FRBM obligations.
  • Economists at NIPFP (National Institute of Public Finance and Policy) noted that uniform tracking frameworks for off-budget borrowings do not yet exist across states, making true consolidated debt comparisons difficult for the 16th Finance Commission period (2026–31).
  • Fifteen of the 28 states recorded fiscal deficits above 3% of GSDP, breaching the threshold recommended by successive Finance Commissions.

Static Topic Bridges

Comptroller and Auditor General of India (CAG)

The CAG is a constitutional authority established under Article 148 of the Indian Constitution, appointed by the President. It is the supreme audit institution of India — responsible for auditing the accounts of the Union government, state governments, and government-owned enterprises. The CAG submits audit reports to the President (for Union accounts) and to the Governor (for state accounts), which are then tabled in Parliament or the relevant state legislature.

  • Constitutional provision: Articles 148–151 govern the CAG's appointment, duties, and reporting.
  • The Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971 defines the scope of audit.
  • The CAG audits Consolidated Fund, Contingency Fund, and Public Account of the Union and states.
  • The CAG's reports are examined by the Public Accounts Committee (PAC) in Parliament and in state legislatures.
  • The CAG has no role in pre-audit (approving expenditure before it happens) — its function is post-audit.

Connection to this news: The State Finances 2024-25 report is a constitutionally mandated CAG audit. The CAG's finding that all 28 states are in deficit, and its specific directive on off-budget disclosure, carries significant weight as an accountability mechanism that Finance Commissions and the RBI cite when assessing state fiscal health.

Off-Budget Borrowings — The Hidden Debt Problem

Off-budget borrowings are funds raised by the government (central or state) through entities outside the main budget — typically SPVs, public enterprises, or extra-budgetary resources (EBRs) — that do not appear in the official fiscal deficit calculation. These borrowings are used to fund capital expenditure, subsidies, or welfare schemes while keeping reported deficit numbers artificially lower than actual fiscal stress.

  • Common routes: State electricity distribution companies (DISCOMs), irrigation boards, road corporations, and welfare corporations borrow on behalf of the state — these liabilities remain off the state budget.
  • Power subsidies are the largest single driver of state off-budget borrowings; states transfer subsidy obligations to DISCOMs rather than budgeting them explicitly.
  • The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 (and state-level FRBMs) cap fiscal deficits but do not include off-budget obligations in their ceiling calculations — creating an incentive to shift borrowing off-book.
  • The RBI's annual State Finances report and successive Finance Commissions have flagged this structural loophole as a threat to genuine fiscal consolidation.
  • The 15th Finance Commission (2021–26) recommended that states disclose and progressively wind down off-budget borrowings.

Connection to this news: The CAG's finding that ₹90.51 lakh crore in combined state liabilities excludes a significant but poorly tracked off-budget component. Without uniform disclosure, the 16th Finance Commission cannot accurately assess the consolidated debt burden of states — which directly affects revenue-sharing devolution norms and fiscal capacity grants.

FRBM Act and State Fiscal Responsibility

The Fiscal Responsibility and Budget Management Act, 2003, was enacted at the Union level and mirrors were adopted by states as State FRBM Acts. The law obliges governments to progressively reduce fiscal deficits, eliminate revenue deficits, and maintain rolling medium-term fiscal policy statements.

  • Target fiscal deficit for states (post-15th Finance Commission): 3% of GSDP (with an additional 0.5% for states undertaking power sector reforms).
  • "Fiscal deficit" under FRBM is narrowly defined and does not capture guarantees, contingent liabilities, or off-budget SPV borrowings.
  • The NK Singh Committee (2017) recommended strengthening the FRBM with escape clauses and a Fiscal Council — some recommendations were partially adopted.
  • The 16th Finance Commission (2026–31), chaired by Arvind Panagariya, is mandated to review states' debt trajectories and recommend a glide path back to fiscal consolidation.

Connection to this news: With 15 states already breaching the 3% FRBM threshold on reported figures, and off-budget liabilities adding further undisclosed pressure, the CAG report lands at a moment when the 16th Finance Commission must take a comprehensive view of true state indebtedness.

Key Facts & Data

  • Combined outstanding liabilities of 28 states as of March 31, 2025: ₹90.51 lakh crore
  • All 28 states reported fiscal deficits in FY25 — first time since the post-pandemic recovery
  • 15 out of 28 states recorded fiscal deficits exceeding 3% of GSDP
  • States' own tax revenue grew from ₹8.40 lakh crore (2015-16) to ₹20.31 lakh crore (2024-25)
  • FRBM fiscal deficit ceiling for states: 3% of GSDP (up to 3.5% for power sector reformers)
  • Constitutional authority: CAG governed by Articles 148–151; reporting governed by the CAG Act, 1971
  • Off-budget borrowing routes: DISCOMs, SPVs, state road/irrigation corporations
  • 16th Finance Commission period: 2026–31, chaired by Arvind Panagariya
On this page
  1. What Happened
  2. Static Topic Bridges
  3. Comptroller and Auditor General of India (CAG)
  4. Off-Budget Borrowings — The Hidden Debt Problem
  5. FRBM Act and State Fiscal Responsibility
  6. Key Facts & Data
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