Reserve Bank of India (RBI) report has warned states that giving concessions like farm loan waivers, free power and transport could drain them of crucial resources for social and economic infrastructure.
Reserve Bank of India (RBI) report has warned states that giving concessions like farm loan waivers, free power and transport could drain them of crucial resources for social and economic infrastructure.
However, the RBI report titled ‘State Finances: A Study of Budgets 2024-25’ says that state governments have made commendable progress towards fiscal consolidation by keeping their gross fiscal deficit within three per cent of gross domestic product (GDP) for three consecutive years (2021-22 to 2023-24). The states have limited the revenue deficit to 0.2 per cent of GDP in 2022-23 and 2023-24.
According to the report released on Thursday, “The reduction in fiscal deficit has given states the scope to increase their capital expenditure and improve the quality of expenditure.” The report says that many states have announced farm loan waivers, free electricity to agriculture and households, free transport, allowances to unemployed youth and cash assistance to women in their budgets for the current financial year.
Such expenditure can drain the resources available to them and hamper their ability to build important social and economic infrastructure. According to the RBI report, a sharp increase in expenditure on subsidies has created an area of initial stress, which is due to agricultural loan waivers, free/subsidized services (such as electricity to agriculture and households, transport, gas cylinders) and cash transfers to farmers, youth and women.
According to the report, states need to control and rationalize their subsidy expenditure so that such expenditure does not hamper more productive expenditure. According to the RBI study, due to high debt-GDP ratio, outstanding guarantees and increasing subsidy burden, states need to remain on the path of fiscal consolidation by placing more emphasis on development and capital expenditure.
Apart from this, improvement in the quality of expenditure is also necessary. However, the total outstanding liabilities of the states have come down to 28.5 percent at the end of March 2024, whereas it was 31 percent of GDP at the end of March 2021. But it still remains above pre-pandemic levels.
