Four Indian states that maintained revenue surpluses have experienced a dramatic shift, slipping into revenue deficit within just two years from FY23 to FY25. According to the Comptroller and Auditor General's latest State Finances report, Karnataka, Telangana, Chhattisgarh and Bihar now face a combined deficit of ₹35,710 crore in FY25. This represents a stark contrast to the ₹1.14 trillion combined post-devolution surplus that was estimated by the Fifteenth Finance Commission for FY25. As per the CAG report, the deficit emerged due to a combination of expanding welfare guarantees, higher subsidies and, in some cases, a fall in own tax collections across these states.
Karnataka emerged as the country's biggest subsidy spender in proportional terms, with subsidies comprising 14% of total expenditure and rising 49% from FY24 to FY25. According to the CAG, energy subsidies alone increased by ₹8,086 crore, transport subsidies nearly tripled, and social welfare and nutrition spending surged from ₹32,677 crore to ₹49,592 crore. Despite revenue receipts growing 10.6% year-on-year to ₹2.58 trillion, revenue expenditure surged nearly 15%, pushing the deficit to ₹20,834 crore against a Finance Commission expectation of a ₹32,433-crore surplus. The CAG flagged that pension and interest outgo together rose by ₹11,088 crore, adding to the state's fiscal pressures.
Telangana experienced a significant decline in own tax revenue, falling from ₹1.11 trillion in FY24 to ₹1.09 trillion in FY25. According to the CAG report, while expenditure grew only 5%, subsidies climbed 65% to ₹15,553 crore, with social welfare subsidies rising fourfold between FY24 and FY25. The state's financial position deteriorated dramatically, slipping from a surplus of ₹779 crore to a revenue deficit of ₹9,420 crore in just one year. The CAG noted that Telangana spent 363 of 365 days on Reserve Bank of India Ways and Means Advances and carries the country's largest stock of state guarantees at over 10% of GSDP as of end-FY24. As per Canara Bank's chief economist Madhavankutty G, a major cause of the deficit has been the phasing out of goods and services tax compensation cess, along with lower share of devolution from central transfers.
Chhattisgarh maintained a comfortable ₹8,592-crore surplus in FY23 before expenditure accelerated sharply, with revenue spending jumping 35% in FY24 and another 9% in FY25. As reported by the CAG, subsidies climbed 53% to ₹16,539 crore last year, with agriculture support nearly doubling to ₹7,905 crore. Bihar showed similar trends with social services spending jumping 21% from FY24 to FY25, including education expenditure increasing 33% and social welfare spending rising 64%. The state's committed expenditure - salaries, pensions and interest payments - jumped 20% in a single year to ₹84,293 crore, with the salary bill alone up 36%. According to Canara Bank's analysis, Bihar suffers from disproportionate spending on social infrastructure due to development concerns, leading to revenue expenditure overshooting receipts.
According to Madhavankutty G, chief economist at Canara Bank, the common thread across all states is revenue expenditure, mainly salaries and pensions, rising faster than revenue receipts due to muted tax collections. Election-related freebies and populist measures are additional factors denting the revenue profile of these states. The CAG report highlights that these states were estimated to have a revenue surplus by the Fifteenth Finance Commission in FY25, making their transition to deficit particularly concerning for fiscal sustainability. Canara Bank notes that for Karnataka and Telangana, a lower share of devolution from central transfers and shortfalls from centrally sponsored schemes have compounded their fiscal challenges, as many southern states haven't implemented central schemes due to ideological or political differences.
