RBI Flags Concerns Over State Budgets: A Call for Fiscal Prudence
Introduction: Balancing Growth and Fiscal Discipline
The Reserve Bank of India (RBI) has raised alarms about the financial strategies of several state governments, particularly their allocation of funds towards subsidies and welfare schemes.
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Subsidy Outlay: A Growing Concern
State governments have announced various welfare measures in their budgets for 2024-25, including farm loan waivers, free electricity, transport allowances, and monetary assistance programs. While these initiatives aim to address immediate socio-economic needs, the RBI cautions that such spending risks crowding out investments in critical social and economic infrastructure.
Tax Revenue Efficiency: A Positive Shift
States have shown improved efficiency in tax collection, with the post-pandemic average tax buoyancy rising to 1.4 during FY21-25, compared to 0.86 in the pre-pandemic period (FY13-FY20). A buoyancy rate above 1% indicates revenue growth outpacing nominal GDP growth, enabling states to allocate more funds towards productive asset creation.
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Capital Expenditure: Driving Growth Amid Fiscal Challenges
States have earmarked ₹9.2 trillion for capital outlay in FY25, equating to 2.8% of GDP, compared to ₹7.6 trillion (2.6% of GDP) in FY24. This increase aligns with the Centre's push for infrastructure development as a key driver of economic growth. Despite this, the gross fiscal deficit of states is projected at 3.2% of GDP in FY25, up slightly from 2.8% in FY24.The central government’s support through grants has also played a significant role, with an effective capex allocation of ₹15 lakh crore this year.
Debt and Fiscal Deficits: Mixed Performance Across States
The fiscal health of states varies significantly. Smaller states like Arunachal Pradesh, Himachal Pradesh, Sikkim, and Tripura are grappling with high fiscal deficits, while larger economies such as Gujarat and Maharashtra have budgeted lower deficits relative to GDP.The overall debt-to-GDP ratio for states remains at 28.5% as of March 2024, unchanged from the previous year but still above the pre-pandemic level of 31% in March 2021.
Subsidy Rationalization: A Path to Fiscal Sustainability
The RBI has urged states to rationalize subsidies and focus on high-priority expenditures. Centrally Sponsored Schemes (CSS) could also be streamlined to create fiscal space for state-specific needs, reducing the financial burden on both state and central governments.
Conclusion: The Need for a Clear Fiscal Roadmap
The RBI’s observations underline the importance of fiscal discipline as states balance welfare spending with long-term growth priorities. A credible, time-bound roadmap for debt and deficit reduction is crucial to ensuring that fiscal policies remain sustainable and development-oriented.
By addressing the rising subsidy burden and optimizing spending quality, state governments can build a resilient economic foundation for the future.
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