RBI report points at rising state spending on loan waivers, cash transfers

States need to contain and rationalise their subsidy outgoes, so that such spending does not crowd out more productive expenditure, the Reserve Bank of India (RBI) has said.

A report, entitled ‘RBI’s State Finances: A Study of Budgets 2024-25,’ released on Thursday (December 19), has pointed out that an area of incipient stress is the sharp rise in expenditure on subsidies, driven by farm loan waivers, free/subsidised services and 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. Rationalisation of centrally sponsored schemes (CSS) can free up budgetary space to meet State-specific expenditure needs and reduce the fiscal burden of both the Union and the State governments. Persistent high level of subnational debt calls for a credible roadmap for debt consolidation. Following the Centre’s strategy outlined in the Union Budget 2024-25, States with elevated debt levels may establish a clear transparent and time-bound glide path for debt consolidation,” the RBI report said.

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Elaborating on centrally sponsored schemes (CSS), the report said further rationalisation of the number of such schemes can make room for undertaking more productive expenditure.

According to a Moneycontrol analysis of the past few years’ budgets, the share of central sector schemes increased to 32.2% in FY24 from 27.4% in FY18, while the share of centrally sponsored schemes went down to 10.5% from 13.3% earlier.

“States’ outstanding liabilities are declining, but still are above pre-pandemic level. All current/revenue expenditures should be financed from current revenue. Capital expenditure should be financed through borrowings and should have a clear, transparent & time-bound glide path for debt consolidation. Uniform reporting of contingent liabilities & off-budget borrowings by states is important,” the report added.

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