The RBI’s report, State Finances: A Study of Budgets of 2024-25, raises key concerns and recommendations about the fiscal management practices of Indian states.
1. Rise in Expenditure on Subsidies
- Concern: The report flags the increasing expenditure on subsidies such as:
- Farm loan waivers.
- Free or subsidized electricity, transport, and gas cylinders.
- Cash transfers to farmers, youth, and women.
- Example: Delhi’s new Mukhya Mantri Mahila Samman Yojna offers monthly monetary assistance to women, which is expected to increase fiscal burden.
- Impact:
- Subsidies, while providing short-term benefits to targeted groups, can lead to:
- Increased fiscal deficits.
- A reduction in funds for productive investments in sectors like infrastructure, health, and education.
- This risks long-term economic growth and financial stability.
- Subsidies, while providing short-term benefits to targeted groups, can lead to:
- Recommendation: States should rationalize subsidies by targeting them better and prioritizing areas that yield higher economic returns.
2. Subnational Debt Levels
- Concern:
- State debts, though slightly reduced, remain at 28.5% of GDP (March 2024)—above the 20% recommended by the FRBM Review Committee (2017).
- Reason: Persistent deficits from rising subsidy burdens and other expenditure outlays contribute to unsustainable debt.
- Recommendation:
- States with high debt should follow a clear, transparent, and time-bound debt consolidation plan.
- Align debt management with goals like macroeconomic stability, fiscal flexibility, and economic resilience.
3. Centrally Sponsored Schemes (CSS)
- Concern:
- Too many CSS reduce the flexibility of states in deciding expenditure priorities and dilute the spirit of cooperative fiscal federalism.
- Recommendation:
- Rationalize CSS to:
- Free up fiscal resources for state-specific needs.
- Reduce the fiscal burden on both the Union and state governments.
- Rationalize CSS to:
4. Importance of Fiscal Transparency
- Key Points:
- Timely Data: Reliable, consistent data is crucial for fiscal risk assessment.
- Off-Budget Borrowings: Transparency in reporting off-budget borrowings (e.g., loans raised by public sector enterprises backed by states) will:
- Improve fiscal discipline.
- Potentially lower borrowing costs.
5. Enhancing Public Expenditure Efficiency
- Outcome Budgeting:
- What is it? Linking government spending to measurable results and developmental outcomes.
- Why is it important?
- Improves accountability.
- Ensures targeted use of resources for maximum developmental impact.
- Example: Allocating funds for infrastructure should show measurable progress like kilometers of roads constructed or percentage of population with access to public transport.
- Public Trust: Outcome-based reporting increases transparency, showing citizens how tax money is utilized. This fosters:
- Public trust.
- Civic engagement.
- Improved spending quality.
6. Climate Budgeting
- What is it? Integrating climate action into fiscal planning.
- Why is it needed?
- Climate change poses significant risks to economic stability, especially in vulnerable states prone to natural disasters.
- Climate budgeting ensures that public expenditure accounts for:
- Mitigation of climate risks.
- Sustainable development priorities.
- Recommendation: States should prioritize adopting climate budgeting frameworks to align their fiscal policies with environmental goals.
7. Broader Implications of Recommendations
- Balanced Spending: States should reallocate funds from less productive subsidies to high-impact areas like infrastructure, health, and education.
- Debt Sustainability: Managing debt levels responsibly is crucial for long-term fiscal stability.
- Flexibility in Spending: Rationalization of CSS will empower states to tailor their budgets according to local needs.
- Transparency and Trust: Outcome-based and climate budgeting improves accountability and public engagement, leading to better governance.
Conclusion:
The RBI emphasizes that while subsidies and grants can provide immediate relief, they must be balanced with long-term fiscal discipline. By focusing on rationalizing expenditures, enhancing transparency, and prioritizing impactful sectors, states can achieve sustainable growth, maintain fiscal stability, and foster public trust.
