CAG shines a light on state govts' expenses, asks officials for clarity

The CAG last week raised concerns over unclassified expenditures, questioning state finance secretaries over 'hidden' funds marked for various handouts

Where does the West Bengal government park the pocket allowances it pays to associations and clubs across the state to finance activities like Durga Puja? Or where does the Uttar Pradesh government keep the funds it uses to support passengers or their heirs if a state transport bus they were travelling in is involved in an accident?

These were some of the hard questions asked by the Comptroller and Auditor General (CAG) to state finance secretaries last week. What emerged from the meeting was that most state governments do not follow a common rule or procedure to classify expenditure. What was left unsaid was that the auditors want to know where states park their money for their myriad handouts.

These issues are significant as India is now a member of at least two emerging market indices, Bloomberg and FTSE. It is Government of India papers that are being traded now, but given the demand for those papers, it is likely only a matter of time that state-sponsored papers will follow. At that time, state governments’ borrowing and usage of funds will no doubt become an important question for buyers.

“To make that happen, it is essential that the quality of state expenditure improves,” said a CAG official, who declined to be named because s/he is not authorised to speak to the public.

To that end, the CAG called for its first meeting with the finance secretaries of state governments. These secretaries meet the union expenditure secretary annually, but this was the first time they met CAG officials. No central government bodies, including the Finance Commission, have the time to check for inconsistencies in state governments’ numbers. Thus, making the meeting with state finance secretaries an annual affair will mean that such checks are institutionalised. 

CAG chief Girish Chandra Murmu noted during the meeting that there was a pressing need for harmonisation of expenditure across all states. “It is a matter that has engaged the attention of a number of stakeholders for some time now,” he said, adding that he hoped it “would be a key outcome of the conference”.

States, of course, often have valid reasons to squirrel away funds to obscure corners of their fiscal map. The demand for freebies is rising, and as states take innovative steps to bury funds, such as to support Durga Puja festivities or lack of support for accident victims, auditors feel outflanked and find it difficult to track the money trail. This often means state fiscal or revenue deficits deviate from actual conditions.

In the case of West Bengal, for instance, the state government operates an omnibus heading, ‘Minor Head 800’. The opaque description simply says “other expenditure,” which means there is no way to trace where the money has actually gone.

Between 2016 and 2021, the state operated ‘Minor Head 800’ extensively. The sum was Rs 11,661 crore in 2016-17, which made up 8.5 per cent of the state’s total expenditure. To its credit, that number has since fallen to Rs 6,706 crore, but still remains 4 per cent of the state’s total expenditure. 

Auditors have begun to examine this data more closely after the CAG introduced a chapter on the quality of financial reporting by state governments.

In the case of UP, for instance, auditors found that while there is a nearly two-decade-old rule that the state government must establish the Uttar Pradesh Road Transport Accident Relief Fund to compensate accident victims, this fund is yet to be set up.

Yet, from 2015 to 2023, the state has been charging a tax to finance, among other things, inflows into the fund. The latest audit report shows the cumulative sum is Rs 915.46 crore, but naturally, no accrual has happened into the fund. The sum “could not be credited as the fund was not established.” The omission helps the state shore up its balance sheet. As the audit report points out: “This also had an impact on the Revenue Surplus and Fiscal Deficit of the State for the year 2022-23, which was overstated and understated, respectively.”

Deputy CAG (Government Accounts) Jayant Sinha said it has been decided to make the conference an annual event in the fiscal calendar. “This would provide an opportunity to engage with the state governments and related stakeholders in the fiscal space on the broader issue of public financial management.”

The problem of state finance report cards speaking in different voices has also been flagged by the Finance Commissions. The 13th Finance Commission, for instance, called for the “need for uniformity at the object head level to improve financial comparison and consistency across states”, restating the concern voiced by the earlier 12th Commission.

Following the CAG’s commitment to states’ fiscal transparency, state government officials can longer delay the inevitable. They will have to present an account of how finances have been managed, essentially ironing out inconsistencies.