New Delhi, India – : The Reserve Bank of India (RBI) has raised concerns over the increasing subsidy expenditure by states, terming it an “incipient stress” on their finances. In its report titled State Finances: A Study of Budgets of 2024-25, the central bank called for the rationalization of subsidies to ensure such spending does not undermine more productive expenditures.
The Cost of Subsidies
State subsidies include measures like farm loan waivers, free or subsidized electricity, transport, gas cylinders, and cash transfers to farmers, youth, and women. The RBI emphasized that these expenditures, often referred to as “freebies” in political debates, tend to surge ahead of elections, crowding out resources needed for critical social and economic infrastructure.
The report highlighted that an unchecked subsidy burden could hamper states’ ability to invest in sectors like health, education, agriculture, research and development, and rural infrastructure. Such investments are essential for sustainable job creation and poverty alleviation.
Call for Fiscal Discipline
“High debt-GDP ratios, outstanding guarantees, and the rising subsidy burden require states to persevere with fiscal consolidation while prioritizing developmental and capital spending,” the RBI noted.
While acknowledging the progress made by states in fiscal consolidation, the report stressed the need for further action. States have managed to contain their aggregate gross fiscal deficit within 3% of GDP for three consecutive years (2021-22 to 2023-24) and restricted revenue deficit to 0.2% of GDP in 2022-23 and 2023-24. This fiscal discipline has allowed states to scale up capital spending and improve the quality of their expenditures.
Debt Concerns and Recommendations
Despite these gains, the overall debt of states remains a concern. While it has declined from 31.8% of GDP in March 2004 to 28.5% in March 2024, it is still well above the 20% level recommended by the Fiscal Responsibility and Budget Management (FRBM) Review Committee (2017).
The RBI suggested states could improve their fiscal parameters by adopting advanced technologies like data analytics, machine learning, and artificial intelligence to refine taxation systems and enhance tax collection. Additionally, timely revisions of user charges for services such as power, water, and transport could help boost non-tax revenue.
Balancing Act
The RBI’s report underscores the need for a careful balance between providing subsidies and maintaining fiscal health. Rationalizing subsidies could free up resources for essential development activities, enabling states to achieve long-term economic growth and stability.