Context: Recently, the Reserve Bank of India (RBI) has released a report on “State Finances — A Study of Budgets of 2024-25.” The report emphasises the need for sustained fiscal prudence to states while prioritising growth-enhancing capital spending.
Relevance of the Topic: Prelims: Key facts related to fiscal deficit, debt management, Fiscal Responsibility and Budget Management (FRBM) Act.
Observations by RBI:
1. Positive Trends:
- Rising Capital Expenditure: Capital expenditure increased from 2.4% of GDP (2021-22) to 2.8% (2023-24) and budgeted at 3.1% of GDP in 2024-25. This reflects improvement in the quality of expenditure.
- Deficit Management: State governments have contained their gross fiscal deficit (GFD) within 3% of GDP (gross domestic product) and Revenue deficit at 0.2% of GDP during 2022-23 and 2023-24.
- Declining Debt levels: States’ total outstanding liabilities have declined from 31.% of GDP (March 2021) to 28.5% at March 2024.
- Policy Reforms: State-specific fiscal responsibility legislations (FRLs), along with tax and expenditure reforms have strengthened states’ finances over the past two decades.
2. Concerns:
- Rise in Subsidies burden: There is a sharp rise in expenditure on subsidies, driven by:
- farm loan waivers
- free/subsidised services (like electricity to agriculture and households, transport, gas cylinder)
- cash transfers to farmers, youth and women.
- Too many Central government schemes reduce flexibility of State government spending and dilute the spirit of cooperative fiscal federalism.
- Persistent high level of subnational debt calls for a credible roadmap for debt consolidation.
- Through the states’ total outstanding liabilities have declined to 28.5% (March 2024), but they still remain:
- above the pre-pandemic level (25.3% at end-March 2019).
- above the 20% ceiling by Fiscal Responsibility and Budget Management (FRBM) Act, 2017.
- Through the states’ total outstanding liabilities have declined to 28.5% (March 2024), but they still remain:
Suggestions by RBI:
- States need to rationalise their subsidy outgoes so that subsidy spending does not crowd-out capital expenditure.
- Rationalisation of centrally sponsored schemes to free up budgetary space to meet State-specific expenditure and reduce fiscal burden of both Union and State governments.
- Develop a transparent and time-bound debt consolidation roadmap, aligned with macroeconomic objectives such as debt sustainability, resilience, and fiscal flexibility.
- Consistent reporting of contingent liabilities and off-budget borrowings to enhance fiscal transparency and aid in assessing fiscal health of States.
- Improving public expenditure efficiency by implementing outcome budgeting, i.e., linking spending to measurable outcomes.
- Adoption of climate budgeting to integrate climate action into fiscal planning.
- Leverage technologies like artificial intelligence and machine learning to utilise micro-data generated by state departments for improved public policy and better governance.
- Timely and adequate transfers to local bodies by States to strengthen decentralised governance. A multi-pronged approach is required to refine the process of appointment of State Finance Commissions (SFCs), data collection and improving the quality of SFC reports.
Conclusion: Overall, the State governments have made progress in fiscal consolidation, there is scope for further improvement in expenditure efficiency, outcome and climate budget, transparent data reporting and use of modern techniques. Efforts by States in these areas will pave the way for higher economic growth with macroeconomic stability.