MUMBAI — Maharashtra, India’s wealthiest and most industrialized state, has systematically underreported its borrowings and breached legal deficit limits for years, according to a damning audit by the Comptroller and Auditor General of India (CAG). The findings, which cover the state’s finances from 2018-19 to 2022-23, reveal a pattern of financial opacity that has obscured the true scale of Maharashtra’s debt burden, raising alarms about fiscal transparency and the effectiveness of India’s fiscal responsibility laws.
The CAG’s report, tabled in the state legislature earlier this month, found that Maharashtra’s fiscal deficit exceeded the 3% of Gross State Domestic Product (GSDP) ceiling mandated by the Fiscal Responsibility and Budget Management (FRBM) Act in multiple years. Even in 2022-23, when the state reported a deficit of 2.8%—just below the legal limit—the CAG determined that off-budget liabilities, if included, would have pushed the deficit beyond the threshold. The auditor also flagged a growing debt pile, which stood at ₹6.15 lakh crore ($73.8 billion) as of March 2023, equivalent to 22.8% of GSDP.
What Happened: The CAG’s Findings
The CAG’s audit uncovered three critical failures in Maharashtra’s financial management:
1. Underreported Borrowings and Off-Budget Liabilities
The state resorted to off-budget borrowings through state-owned enterprises and special purpose vehicles (SPVs) to fund infrastructure projects, a practice that kept these liabilities off the official books. The CAG estimated that such borrowings amounted to ₹1.2 lakh crore ($14.4 billion) over the five-year period, none of which were reflected in Maharashtra’s fiscal deficit calculations. This allowed the state to present a misleadingly rosy picture of its finances while accumulating hidden debt.
2. Misclassification of Expenditures
The audit revealed discrepancies in how Maharashtra categorized its spending, with revenue expenditures (such as salaries and subsidies) sometimes misclassified as capital expenditures (such as infrastructure investments). This manipulation artificially inflated the state’s reported capital spending, which is often viewed more favorably by investors and credit rating agencies.
3. Breach of FRBM Act Limits
The FRBM Act, enacted in 2003, mandates that states keep their fiscal deficits below 3% of GSDP to ensure long-term debt sustainability. Maharashtra breached this limit in at least two of the five years audited, though the state government’s official figures suggested compliance. The CAG’s inclusion of off-budget liabilities would have exposed further violations.
Why It Matters: Fiscal Transparency and Investor Confidence
Maharashtra’s financial mismanagement has far-reaching implications for both the state and India’s broader fiscal framework.
– Erosion of Fiscal Discipline
The FRBM Act was designed to prevent states from spiraling into unsustainable debt, which could trigger macroeconomic instability. Maharashtra’s repeated breaches—coupled with its use of off-budget borrowings—undermine the law’s credibility. If states can bypass deficit limits through accounting loopholes, the legal framework risks becoming toothless.
– Investor and Credit Rating Risks
Maharashtra is a key destination for domestic and foreign investment, contributing nearly 15% of India’s GDP. However, the CAG’s findings could dent investor confidence, particularly if credit rating agencies perceive the state’s financial reporting as unreliable. A downgrade in Maharashtra’s credit rating would increase its borrowing costs, diverting funds from development projects to debt servicing.
– Central Government Scrutiny
The Union government, which relies on states to self-report their fiscal positions, may now face pressure to tighten oversight. The CAG’s report could prompt the Centre to mandate stricter disclosure norms for off-budget borrowings or even impose penalties on states that violate FRBM limits.
– Wider Fiscal Stress in Indian States
Maharashtra is not alone in its fiscal struggles. Several states, including Punjab, Kerala, and West Bengal, have also breached FRBM limits in recent years, often due to rising welfare expenditures and stagnant revenue growth. The CAG’s report highlights a systemic issue: India’s fiscal responsibility framework may be ill-equipped to handle the financial pressures facing state governments in the post-pandemic era.
Background and Context: Maharashtra’s Fiscal Decline
Maharashtra’s financial troubles did not emerge overnight. The CAG’s report traces a steady deterioration over the past five years, driven by a combination of economic slowdowns, rising expenditures, and questionable accounting practices.
– Revenue Stagnation
Maharashtra’s revenue growth has lagged behind its expenditure commitments, particularly in the wake of the COVID-19 pandemic. While the state’s GSDP grew at an average annual rate of 7.5% between 2018-19 and 2022-23, its own tax revenue (a key source of funding) grew at just 5.2% during the same period. This gap has forced the state to rely increasingly on borrowings to bridge its budget shortfalls.
– Rising Expenditure Pressures
The state’s spending on welfare schemes, subsidies, and infrastructure projects has surged in recent years. For instance, Maharashtra’s expenditure on the Mahatma Jyotirao Phule Jan Arogya Yojana (a health insurance scheme for the poor) nearly doubled between 2018-19 and 2022-23, from ₹1,200 crore to ₹2,300 crore. Similarly, the state’s ambitious Mumbai Coastal Road Project, estimated to cost ₹12,721 crore, has been funded through a mix of budgetary allocations and off-budget borrowings.
– Off-Budget Borrowings: A Growing Trend
The use of off-budget borrowings has become a common tactic among Indian states to circumvent FRBM limits. These borrowings, often routed through state-owned enterprises or SPVs, do not appear in the state’s official fiscal deficit calculations. While the Centre has previously cracked down on such practices—most notably in 2021, when it barred states from raising off-budget loans without its approval—Maharashtra appears to have continued the practice, albeit in a more opaque manner.
Competing Claims and Uncertainty
The CAG’s report has sparked a debate between the auditor and the Maharashtra government over the interpretation of financial data.
– Maharashtra’s Defense: Accounting Adjustments and Transitional Challenges
In its response to the CAG, Maharashtra’s finance department acknowledged the discrepancies but attributed them to “accounting adjustments” and “transitional challenges” in adopting new financial reporting standards. The state argued that the off-budget borrowings were necessary to fund critical infrastructure projects and that the liabilities would eventually be absorbed into the state’s budget.
However, the CAG rejected this explanation, noting that Maharashtra had not provided a clear timeline for integrating these liabilities into its official accounts. The auditor also pointed out that the state’s misclassification of expenditures violated the Government Accounting Standards Advisory Board (GASAB) guidelines, which mandate accurate and transparent financial reporting.
– Expert Opinions: A Systemic Issue or State-Specific Failure?
Economists and fiscal policy experts are divided on whether Maharashtra’s financial mismanagement reflects a broader systemic failure or a state-specific governance issue.
– Proponents of Stricter Oversight
Some experts argue that the CAG’s findings expose a fundamental flaw in India’s fiscal responsibility framework. Dr. Rathin Roy, former member of the Prime Minister’s Economic Advisory Council, told Herald Express that the FRBM Act’s reliance on self-reporting by states is inherently flawed. “If states can hide liabilities through off-budget borrowings, the law loses its purpose. The Centre needs to enforce stricter disclosure norms and penalize non-compliance,” he said.
– Defenders of State Autonomy
Others contend that Maharashtra’s financial struggles are unique and should not be used to justify central intervention. M. Govinda Rao, former director of the National Institute of Public Finance and Policy, noted that the state’s high debt levels are partly a consequence of its ambitious infrastructure projects. “Maharashtra is investing heavily in long-term assets like metro rail and coastal roads. While transparency is important, we must also recognize that states need flexibility to fund development,” he said.
– Credit Rating Agencies Weigh In
Credit rating agencies, which assess the financial health of states, have so far taken a cautious approach. CRISIL, a leading rating agency, stated that Maharashtra’s debt levels remain “manageable” but warned that persistent fiscal slippages could lead to a downgrade. “The CAG’s report is a red flag. If the state does not address its off-budget liabilities, it could face higher borrowing costs,” a CRISIL analyst said.
What to Watch Next: Key Developments
The CAG’s report is likely to trigger a series of actions and reactions in the coming months:
1. State Government’s Response
Maharashtra’s government, led by Chief Minister Eknath Shinde, has yet to announce concrete measures to address the CAG’s findings. The state’s finance department is expected to submit a corrective action plan to the auditor, outlining steps to improve financial transparency and align its reporting with FRBM norms. However, given the political sensitivities around welfare spending and infrastructure projects, any austerity measures could face resistance from coalition partners.
2. Central Government’s Role
The Union government, which has previously intervened in states’ fiscal affairs (such as imposing borrowing limits during the pandemic), may now push for stricter enforcement of FRBM rules. The 15th Finance Commission, which recommended fiscal discipline measures for states, could also weigh in on the issue. Additionally, the Centre may consider linking future financial transfers to states’ compliance with fiscal responsibility norms.
3. Credit Rating Agencies’ Assessment
Moody’s, S&P, and CRISIL are likely to review Maharashtra’s credit rating in light of the CAG’s report. A downgrade would increase the state’s borrowing costs, making it more expensive to fund development projects. Conversely, if the state takes swift corrective action, its rating could remain stable.
4. Legal and Legislative Scrutiny
Opposition parties in Maharashtra, including the Indian National Congress and Nationalist Congress Party (NCP), have demanded a legislative inquiry into the state’s financial mismanagement. The Maharashtra Legislative Assembly’s Public Accounts Committee (PAC) is expected to review the CAG’s report and summon state officials for questioning.
5. Impact on Upcoming State Elections
Maharashtra is scheduled to hold local body elections later this year, followed by state assembly elections in 2024. The CAG’s findings could become a political flashpoint, with opposition parties accusing the Shinde government of financial mismanagement. The ruling Shiv Sena-BJP-NCP alliance may face pressure to defend its fiscal policies, particularly if the Centre imposes borrowing restrictions.
Conclusion: A Test for Fiscal Responsibility
The CAG’s report on Maharashtra’s underreported borrowings and deficit breaches is more than just an accounting scandal—it is a test of India’s fiscal responsibility framework. If states can routinely bypass legal deficit limits through off-budget borrowings and creative accounting, the FRBM Act risks becoming a paper tiger.
For Maharashtra, the immediate challenge is to restore transparency and credibility to its financial reporting. The state must integrate off-budget liabilities into its official accounts, correct misclassifications, and demonstrate a commitment to fiscal discipline. Failure to do so could have serious consequences, from higher borrowing costs to a loss of investor confidence.
At the national level, the Centre must decide whether to strengthen oversight of state finances or risk a repeat of Maharashtra’s fiscal opacity in other states. The CAG’s findings serve as a wake-up call: without robust enforcement mechanisms, India’s fiscal
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Story synopsis gathered from: NDTV – India News — source.
