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Informist, Thursday, Dec. 19, 2024

 

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--RBI report: States must contain, rationalise subsidy outgoes 
--CONTEXT: Comments from RBI report on FY25 state budgets 
--RBI report: Too many Centre's plans lower state govt spending flexibility 
--RBI report:Too many Centre's schemes dilute cooperative federalism spirit 
--RBI report: Rationalising centre's plans can allow state-specific spending 
--RBI report: Debt-ridden states may consider glide path to consolidate debt 
--RBI report: Scope for states to further improve expenditure efficiency

 

NEW DELHI – The high debt levels of state governments necessitate a "clear, transparent and time-bound" glide path for consolidation, a Reserve Bank of India report released Thursday said. The 'State Finances: A Study of Budgets of 2024-25 (Apr-Mar)' report also said that "too many" Central government schemes reduce flexibility of state government spending and dilute the spirit of cooperative fiscal federalism.

"While the progress in improving post-pandemic state finances is commendable, a durable fiscal consolidation must mark the way forward," the RBI report said. "Following the Centre's strategy outlined in the Union Budget 2024-25 (Apr-Mar), states with elevated debt levels may establish a clear, transparent and time-bound glide path for debt consolidation, that is aligned with macroeconomic objectives such as debt sustainability, economic resilience, and fiscal flexibility." 

 

The fiscal consolidation glide path of states must be transparent with uniform reporting of outstanding liabilities, including off-budget borrowings and guarantees, the report said, adding that strengthening of state Finance Commissions is also critical for ensuring adequate and timely fund transfers to local bodies.

 

According to the RBI report, the consolidated gross fiscal deficit of Indian states fell to an average of 2.7% of GDP during FY05 to FY24, from 4.3% of GDP during FY99 and FY04. The overall debt of states has also declined to 28.5% of GDP by the end of FY24 from 31.8% of GDP at end-March 2004. Debt levels, however, remain well above the 20% mark recommended by the Fiscal Responsibility and Budget Management Review Committee.

 

The report presented several other suggestions on how the fiscal health of state governments can be improved further, including rationalising centrally sponsored schemes, which can free up budgetary space to meet state-specific expenditure needs and reduce the fiscal burden of both the Centre and the state governments.

 

An area of incipient stress for state government finances is the sharp rise in expenditure on subsidies, driven by farm loan waivers, free and subsidised services such as electricity, and cash transfers. "States need to contain and rationalise their subsidy outgoes, so that such spending does not crowd out more productive expenditure," the report said. 

 

States should try to provide timely data on outstanding liabilities in a uniform format in their budget documents, the report said. This, the report added, would improve the quality of subnational finances and aid both analysts and state governments in assessing fiscal health of states. States should also uniformly report contingent liabilities and off-budget borrowings as they would enhance fiscal transparency and discipline with potential benefits like lower borrowing costs, the report said.

 

The RBI report analysed the fiscal reforms undertaken by state governments over the last two decades and said that the review presented a mixed picture of progress and challenges.

 

On one hand, reforms such as the introduction of direct benefit transfers have generated significant savings for state governments over time, while also improving the delivery of benefits by reducing corruption, duplication, and leakages. On other hand, the weak financial health of the state-owned electricity distribution companies remains a stress point for state government finances, the report said. "States need to prioritise operational efficiency and incentivise the power sector to gradually reduce the reliance on government subsidies."  End

 

Reported by Shubham Rana

Edited by Akul Nishant Akhoury

 

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