A background note can be accessed here: CAG Report: Sikkim's Revenue Surplus Masks Growing Fiscal Pressures
Despite recording a revenue surplus, Sikkim breached the Fiscal Responsibility and Budget Management (FRBM) fiscal deficit limit, while debt and liabilities continued to rise. Does this suggest that existing fiscal indicators and fiscal rules are becoming inadequate for assessing the true health of State finances, and should India's fiscal framework evolve to better capture off-budget liabilities and long-term fiscal risks?
The recent Comptroller and Auditor General of India (CAG) audit report on the State Finance of Sikkim (2023-24) highlights that although Sikkim exhibited a revenue surplus of about 0.90 percent of Gross State Domestic Product (GSDP), it simultaneously registered a fiscal deficit of about 6 percent, well beyond the prescribed FRBM limit of 3 percent, and a debt-to-GSDP ratio of 35.37 percent, exceeding the 28 percent limit prescribed under the Sikkim FRBM Act. This shows that having a revenue surplus does not necessarily imply that the state has sound fiscal health if its debt continues to mount at an unsustainable pace.
However, it should also be noted that Sikkim is not a typical Indian state. Its small population, Himalayan ecological and geographical conditions, narrow tax base, and dependence on central transfers under special fiscal arrangements make its fiscal profile distinct.
Nevertheless, the Sikkim audit provides an opportunity to review whether India’s fiscal framework adequately captures the broader dimensions of fiscal sustainability. The existing FRBM framework relies heavily on annual deficit indicators that do not adequately capture debt sustainability, off-budget borrowing, contingent liabilities, or long-term fiscal risks.
The Union government, taking cognizance of these limitations, gradually transitioned from fiscal deficit targeting toward a debt-anchoring framework with the introduction of the Medium-Term Debt Management Strategy (MTDS) in 2015. It also began disclosing extra-budgetary resources (EBR) in the Union Budget from 2019-20 onwards and stopped incurring new EBR liabilities from 2022-23.
Similar reforms are yet to be introduced in most states, which continue to rely on FRBM Acts centred on annual fiscal deficit limits, and where disclosures relating to off-budget borrowings and contingent liabilities remain uneven and often inadequate. The 16th Finance Commission has accordingly reiterated its recommendation that state borrowing be guided by an MTDS, off-budget borrowings be included in the regular budget, and a uniform framework for the disclosure of all state liabilities be incorporated into State Finance Accounts prepared by the CAG.
Sikkim's economy expanded rapidly, with one of India's highest per capita incomes, yet the audit points to persistent fiscal pressures and weak returns on public investments. Why does strong economic growth not necessarily translate into stronger fiscal capacity, and what does this imply for how States should evaluate the quality, not merely the pace, of economic growth?
Fiscal capacity is measured as the ability of the government to raise revenue through taxes and other sources and to use those resources effectively to fund public expenditure. For strong economic growth to expand the fiscal capacity of a government, it requires effective institutional tax administration with low corruption, limited tax exemptions and tax evasion, and political commitment to revenue mobilisation.
In Sikkim, the buoyancy of own-source revenue with respect to GSDP is less than 1 (0.35), implying that the state’s own tax and non-tax revenue are not growing as fast as the overall economy. The overall revenue buoyancy, however, is 1.18, indicating a high dependence on transfers from the Union Government. The report has identified several factors that constrain the state’s fiscal capacity, including arrears of revenue, a high volume of committed expenditure, incomplete projects, undischarged liabilities, rising debt, and an increasing interest burden.
These reflections indicate that states should assess the quality of growth in addition to its pace. This assessment should extend beyond output growth to include whether economic expansion strengthens the state's own revenue base and improves the efficiency of public spending. A state also needs to examine the size and productivity of the economy, the efficiency of the tax system, administrative capacity to collect taxes, public trust and compliance, monitoring of capital expenditure, and fiscal compliance under state laws. Over time, these factors determine whether economic growth translates into stronger and more resilient fiscal capacity.
Beyond fiscal aggregates, the audit identifies weaknesses in accounting practices, utilisation of public funds, and investment outcomes. Should public financial management place greater emphasis on measuring whether government expenditure creates lasting public value rather than simply ensuring procedural and financial compliance?
Public financial management should focus on ensuring that government funds are spent according to rules and on assessing whether they create lasting social, economic and developmental benefits. Financial compliance is important for accountability, but it alone does not ensure that projects achieve their intended objectives.
As observed in Sikkim, compliance with procedural requirements led to the state incurring about 21.93 percent of its total annual expenditure and 48 percent of its total capital expenditure in March 2025 alone. Furthermore, for 164 sub-heads, the entire annual expenditure was spent during March 2025. The audit highlighted a lack of steady value creation due to poor planning and a rush to meet fiscal deadlines. Although Sikkim’s institutional and fiscal context is distinctive, the audit highlights a challenge relevant to all governments: ensuring that public expenditure translates into tangible developmental outcomes.
India’s public financial management system has progressively evolved from a compliance-based Public Financial Management System (PFMS) toward outcome-oriented budgeting and performance management through reforms such as Output-Outcome Monitoring Framework (OOMF), Integrated Financial Management Information System (FMIS), Direct Benefit Transfer (DBT), performance auditing, and strengthened monitoring by NITI Aayog's Development Monitoring and Evaluation Office. While these reforms have improved transparency and performance measurement at the Union level, their implementation remains uneven across states. The next stage of reform is therefore less about expanding compliance mechanisms than about strengthening states' capacity to link public expenditure with measurable developmental outcomes through better planning, execution and evaluation.