Rethinking PFPI and the CAG’s Decadal State Finance Lens
PM Narendra Modi in Tamil Nadu (Image credit X @narendramodi)
Tamil Nadu exposes the paradox of India’s fiscal health—strong on paper, strained in practice. Sharp metrics can spotlight mounting debts.
By P SESH KUMAR
New Delhi, October 2, 2025 — The Public Financial Performance Index (PFPI) developed by AJNIFM is a bold attempt to distil the complexity of state finances into a format that can speak not only to policymakers but also to engaged citizens. Its strength lies in its accessibility and intent.
Yet, like the CAG’s decadal publication, it suffers from a chronic weakness: it reports only what the official accounts show, not the liabilities and risks that lurk outside the books. The Tamil Nadu experience starkly illustrates this paradox.
A state that shines as fiscally disciplined in the PFPI rankings and in CAG’s decade-long tabulation appears financially fragile once one peels back the layers-temple finances shrouded in opacity, electricity distribution companies (discoms) sinking in arrears, and guarantees on off-budget borrowings that threaten to swamp the revenue surplus.
The real danger is that both the PFPI and CAG’s decadal reviews risk reinforcing a fiscal mirage —encouraging self-congratulation when the reality is far less comforting.
The Allure and Limits of the PFPI
The PFPI is useful, no doubt. It creates a baseline for states’ fiscal health and invites comparisons that might stimulate competition for better governance. But its data source is the government’s own accounts-accounts that are known to omit or underplay three categories of liabilities that determine a state’s solvency: arrears, vacancies, and off-budget borrowings.
Pending liabilities are a case in point. Central Government Health Scheme (CGHS) hospitals, unpaid for months, simply stop admitting patients. State hospitals run skeletal staff because posts are kept vacant in the name of fiscal prudence.
Thus, a revenue surplus on paper coexists with deteriorating public services on the ground. The PFPI, like the CAG’s decadal review, misses this paradox: fiscal discipline without governance dividends.
CAG’s Decadal Publication: More Data, Same Blind Spots
The CAG’s decadal review of state finances ending 2022–23, launched with much fanfare in September 2025, was expected to be a watchdog’s chronicle of fiscal strengths and vulnerabilities. Instead, it reads more like a statistical yearbook and arriving may be two years too late.
True, it provides a panoramic view of trends in revenue, debt, and expenditure, but it too fails to highlight arrears, contingent liabilities, and the fiscal drag of unreformed subsidies.
An illustration is Tamil Nadu: this omission is not academic — it could conceal a growing crisis.
Tamil Nadu: A Fiscal Mirage
Tamil Nadu illustrates how headline numbers mask hidden burdens. PFPI shows a relatively comfortable fiscal picture. The CAG’s decadal review, anchored to 2022–23, reports a revenue surplus and manageable debt ratios. But the ground tells another story.
First, temple finances. The state’s Hindu Religious & Charitable Endowments (HR&CE) Department controls thousands of temples with lands, leases, donations, and ritual incomes running into thousands of crores.
Yet, there is little independent audit. CAG audits only the grants routed through the state exchequer, not the vast bulk of temple revenues. Without statutory empowerment—through amendments to the HR&CE Act or entrustment under the DPC Act—the CAG cannot shine a light into this shadow sector. The PFPI does not even acknowledge the fiscal footprint of this opaque universe.
Second, discom arrears and off-budget borrowing. Tamil Nadu’s electricity subsidies, often described as the price of political populism, are decades old. They are carried on the books of the state-owned discom, not the state’s consolidated fund.
The arrears mount, guarantees pile up, and losses are rolled forward through special purpose vehicles. Yet, none of this disturbs the neat arithmetic of the PFPI or the CAG’s decadal review. Both present the illusion of fiscal prudence while the state mortgages its future for present applause.
One of the most consequential off-budget burdens is the debt of the power distribution companies (discoms). In Tamil Nadu, the state government is now planning to settle ₹83,000 crore of debt for its discoms, according to reports in September 2025.
The Supreme Court has also ordered discom debts to be drastically reduced and capped new borrowing to 3% of the annual revenue requirement, pushing the state to address a liability that has been simmering off-books.
Beyond that headline, the CAG’s 2022 and 2023 audits already flagged that electricity tax collected by TANGEDCO was not being remitted properly into the state’s consolidated fund. For example, between 2018–22, TANGEDCO collected ₹5,039.44 crore in electricity tax, but only remitted about ₹740.30 crore to the State Government, leaving ₹3,527.13 crore uncredited in government accounts. That mismatch is a textbook illustration of how off-budget flows erode the revenue base without triggering red flags in conventional metrics.
These are not small numbers. Over time, built up debts and non-crediting become self-reinforcing: discoms borrow or get loss-funding, the state subsidises or rescues them, but none of that shows explicitly in the “state debt to GSDP” ratios or PFPI’s “contingent liabilities” bucket as it is currently defined.
Temple Funds: Opaque Assets, Hidden Losses
Then there is the issue of temples and religious trusts, governed under Tamil Nadu’s HR&CE (Hindu Religious & Charitable Endowments) Department. The CAG recently accused the State of blocking audits of temple assets between 2019–2022, citing reluctance to cooperate.
The State answered that HR&CE owns no assets and that the CAG can only audit government grants, not temple income or property. That reply is legally suspect, because the State is understood to collect 4–12% of income from temple leases and remits them to its administrative fund.
Tamil Nadu is reported to have over 4.78 lakh acres of land and 22,600 buildings under HR&CE in its inventory, with reported rent collections of ₹117.63 crore for part of the year 2022–23 (July to March).
But because accounting and disclosure are patchy, the real income-and possible leakages-is opaque. If temple lands are sold, leased nominally, wrongly assessed, or not fully captured, the state loses large revenue that never enters its formal ledgers. This is where the rationale and need for a CAG audit get strengthened.
When we combine power debt and tax non-remittance with temple fund opacity, it is clear that government accounts-based metrics could systematically understate real liabilities. That is a blind spot that neither PFPI nor the CAG’s decadal study can fully overcome.
Finally, governance deficits. The paradox is sharpest here: a state claiming fiscal discipline yet unable to pay contractors on time, unable to recruit doctors and police officers in adequate numbers, unable to restore credibility to its temple administration. Citizens experience decline even as indices report stability.
The Way Forward: From Illusions to Integrity
The PFPI and the CAG’s decadal publication are not failures—they are incomplete truths. They can evolve into powerful tools if they incorporate the shadows they currently ignore. Also try to make evaluation more easily comprehensible to the average educated person if not the common man.
The path is clear: Incorporate arrears and vacancies as explicit variables. A fiscal surplus that coexists with unpaid hospitals or police shortages is no surplus at all.
Capture off-budget borrowings and guarantees, not as footnotes but as core metrics. No index can claim to measure fiscal performance if it ignores liabilities shifted onto discoms and SPVs.
Mandate transparency in temple finances and other non-tax revenues that operate at state scale. Either through legislative amendments or judicial intervention, the CAG must be empowered to audit temple funds and report their fiscal footprint.
Move from accounting to accountability: Both the PFPI and CAG must evolve from data compilers to watchdogs, ensuring that fiscal discipline translates into service delivery and public trust.
Regain Courage to Probe Uncomfortable Truths
Fiscal indices and reports are only as honest as the shadows they illuminate. The PFPI has opened a door, but it risks becoming another technocratic tool unless it boldly confronts arrears, off-budget liabilities, and hidden revenue streams. The CAG’s decadal review, meanwhile, has the constitutional authority but must regain the courage to probe the uncomfortable truths behind the numbers.
Tamil Nadu is the cautionary tale: a state that shines in indices yet struggles in reality. Unless these instruments are refined to expose—not conceal—the full fiscal picture, India will continue to celebrate surpluses while drowning in hidden debts.
(This is an opinion piece, and views expressed are those of the author only)
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