RBI expressed concern over increasing subsidy expenditure by the states

New Delhi| The Reserve Bank of India (RBI) expressed concern over rising expenditure by states on subsidies and called for rationalizing such expenditure. States need to control and rationalize their subsidy expenses so that more productive expenditures are not affected by such spending, the central bank said in the report State Finance: Study of the 2024-25 Budget. Subsidies given by states include farm loan waiver, free/subsidized services (such as electricity to agriculture and households, transportation, gas cylinders) and cash transfers to farmers, youth and women. Subsidies, sometimes called free gifts in political discourse, are resorted to by political parties, especially before elections, to win.

Many states have announced concessions related to farm loan waiver, free electricity to agriculture and households, free transportation to a section of people, allowances to unemployed youth and monetary assistance to women. “Such spending could drain the resources available to them and hamper their ability to build critical social and economic infrastructure”, the RBI report said. Higher debt-GDP ratios, outstanding guarantees and rising subsidy burdens require states to stick to fiscal consolidation with greater emphasis on growth and capital spending.

RBI argued that there is a need for an urgent review of expenditure on subsidies to free up resources to increase investment in health, education, agriculture, research and development (R&D) and rural infrastructure, thereby creating more jobs and sustainable Will help in reducing poverty on this basis. RBI said that new pressures are emerging from the increasing subsidy burden, hence there is a need to strengthen fiscal consolidation on the part of the states.

RBI said state governments have made commendable progress towards fiscal consolidation by keeping their gross fiscal deficit within 3 per cent of GDP for three consecutive years (2021-22 to 2023-24) and limiting revenue deficit to 0.2 per cent of GDP in 2022-23 and 2023-24 RBI said this has helped states increase their capital expenditure and improve the quality of expenditure.

The adoption of the Fiscal Responsibility Law (FRL) on the part of state governments in the early 2000’s improved their key fiscal parameters. Simultaneously, the total debt of the States decreased from 31.8 per cent of GDP at the end of March 2004 to 28.5 per cent of GDP at the end of March 2024. However, it is still well above the 20 per cent level recommended by the Fiscal Responsibility and Budget Management (FRBM) Review Committee (2017).

The RBI report suggests that the adoption of data analytics, machine learning and artificial intelligence could help states further improve their tax systems and increase tax efficiency. The report also advised that states can also increase non-tax revenues by timely revision of charges charged, especially for electricity, water and transport services.