The RBI’s report, State Finances: A Study of Budgets of 2024-25,

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.
• 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.

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.