The curious case of a Rs 2.55-trillion discrepancy in state govt accounts

The territories have either spent excessively or have saved unreasonably. In either case, there is a cost that the citizen ends up bearing

There is an unexplained excess spending or saving in various state government accounts running up to Rs 2.55 trillion, as per their audit reports. This has not happened overnight but has been building up over the past few years. To put the number in perspective, it is much more than a quarter of what the states will borrow at Rs 8.97 trillion from the markets in FY21. 

The cost of both, excess spending or savings, is essentially borne by the citizens through lower interest earnings on their investments, since banks that lend to states make provisions on these loans to adjust their earnings accordingly. 

Just one state, Andhra Pradesh, accounts for almost half of this discrepancy, but other states including Bihar, Gujarat and Tamil Nadu have also run up sizable excess spending (See table).  At the other end, running up savings massively are Karnataka, Madhya Pradesh and Telangana. Jharkhand has a low culpability on this score but that could be because its accounts have not been finalised after FY17.

In audit speak, while excess expenditure means the states have spent the money without getting it regularised through the state legislature, excess savings mean a state has borrowed far more than it needed to spend. It has ended up borrowing the excess sum either from the markets or from the Centre, which it could have avoided if its housekeeping was sharp. Kerala, for instance, has an unreconciled savings of Rs 16,653.3 crore in the last audited year of FY19. The state, among others, is running a stiff negotiation with the Centre to release more money to pay for the shortfall in GST compensation. GST accruals have fallen short of the expected growth rate of 14 per cent which the states had been promised. The shortfall is particularly acute this year due to the dislocation due to shutdown in the economy following from the Covid pandemic.

The numbers for excess and savings in state budgets are extracted from the annual reports of the Comptroller and Auditor General (CAG) for each state. Different arms of the CAG maintain the accounts as well as audits of the states. Each year the auditor prepares a key report to be tabled in each state legislature. It is the Appropriation Accounts. While it is mostly a recital of the receipts and spending by all the arms of the state government, former CAG Rajiv Mehrishi had introduced an innovation in it. At the end of the mandatory and formal certificate that accompanies the CAG report, he has introduced a section titled “Emphasis of Matter”. In a paragraph the supreme auditor lists the key discrepancy in the accounts of the state government and which has lain away from the eyes of the state legislature.

For the years FY18 and FY19, the past two years for which the CAG has issued this certificate, almost all the key states were found to have racked up such substantial excess spending or savings, which does not sit well with the “accuracy, transparency and completeness of these accounts and maintaining legislative financial control over public finances” (sic), his certificate notes.

For instance Kerala ran up a savings of Rs 16,653.3 crore because of excess allotment of funds in 40 grants and 23 appropriations under the Revenue Section and and 25 grants and seven appropriations under the Capital Section, the auditor notes. These include heads like MGNREGA (unspent Rs 2,729.53 crore), infrastructural development programmes (unspent Rs 1,552 crore), Sarva Shiksha Abhiyan (unspent Rs 356.92 crore), additional skill acquisition programme (unspent Rs 329.63 crore) among others. The details, available in State Finance Audit Report notes this as "failure of the respective Controlling Officers and the Finance department in making a realistic assessment of the budget requirement based on the expenditure of the previous year and also the ability of the department to utilise the funds". 

In other words, Indian states are not able to spend large chunks of their money well. Normally the CAG comes out with a list of these discrepancies in specific reports such as the performance audit, compliance audit or through financial audit of various departments or state-owned bodies. Highlighting the differences in the accounts statement is a first of sorts, clearly bringing those into the arc lights. 

Prof N R Bhanumurthy, vice chancellor of Bengaluru-based Dr BR Ambedkar School of Economics University feels these differentials are more of a legacy problem in state finances. Once the states clear the slack in their spending patterns, the differences ought to come down, he reflected.

While different states have differing thresholds, legislative control on spending is supposed to be paramount. This means any expenditure by the executive has to be approved by the state legislature. Also, “When there is overall excess under a grant/appropriation even by a rupee, it requires regularisation by the Legislature”. For savings made by the state government the rules are less stringent. If the sum saved is above 5 per cent of the total provision, the executive has to give reasons why it has happened. The reasons for highlighting the omissions are obvious. The elected members are supposed to go beyond just taking the accounts into the records of the house.

Table: Excess spending and savings by various Indian states 

State	Excess/savings disbursement	Year	Previous year's figure	Batch of years	Position
Andhra Pradesh	47,143.00	FY18	51,678.49	FY14-FY17	Excess
Bihar	11,046.78	FY18	24,318.74	FY13-FY17	Savings
Gujarat	2,394.24	FY19	4,607.60	FY08-FY17	Excess
Haryana	540.60	.	.	FY18	Excess
Jharkhand*	526.04	.	.	FY17	Savings
Karnataka	24,335.20	.	.	FY19	Savings
Kerala	16,653.30	.	.	FY19	Savings
Madhya Pradesh	18,042.78	.	.	FY18	Savings
Maharashtra	946.16	FY19	779.66	FY16-FY18	Excess
Punjab	2,428.99	.	.	FY18	Savings
Tamil Nadu	3,568.63	.	.	FY18	Excess
Uttar Pradesh	1,337.17	FY18	29,648.64	FY06-FY	Excess
West Bengal	2,618.00	FY18	6,789.00	FY14-FY17	Excess
Telangana	5,627.47	.	.	FY18	Excess
Total	137,208.36	.	117,822.13	.	.
Grand Total	255,030.49	.	.	.	.

*Not finalised after FY17; Source: CAG reports (all figures in Rs crore)

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