The central bank has also come heavily on excessive subsidies and cash transfers to farmers, youth and women.
“ While the progress in improving post-pandemic State finances is commendable, a durable fiscal consolidation must mark the way
Forward” The Reserve bank said in its assessment of state government finances in its report titled “ State Finances: A Study of Budgets of 2024-25 “ released on Thursday.
Acknowledging the improvement in state government finances, the study notes that the consolidated gross fiscal deficit (GFD) of the Indian States fell from an average of 4.3 per cent of GDP during the period 1998-99 to 2003-04 to 2.7 per cent of GDP during 2004-05 to 2023-24.
The overall debt of states declined from 31.8 percent of GDP at end-March 2004 to 28.5 percent of GDP at end-March 2024; however,it remains well above the level of 20 percent recommended by the Fiscal Responsibility and Budget Management (FRBM) Review Committee in 2017.Bur commenting on the state level populist incentives mostly given as fulfillment of election promises the Reserve Bank noted that an area of incipient stress is the sharp rise in expenditure on subsidies, driven
by farm loan waivers, free/subsidised services like electricity to agriculture and households, transport, gas cylinder, besides cash transfers to farmers, youth and women. “ States need to contain and rationalise their subsidy outgoes, so that such spending does not crowd out more productive expenditure” the central bank advised the states .
The central bank also suggested that improving public expenditure efficiency by implementing outcome budgeting like linking spending to measurable outcomes, to foster accountability and targeted resource use is crucial to generate maximum developmental impact. Such an approach would prioritise allocations for sectors with meaningful economic and social benefits, it said.
Additionally, outcome-based reports provide citizens an insight of how their tax money is being utilised, fostering public trust, encouraging civic engagement and enhancing the quality of spending.
It underscored the need for states to strengthen data systems, build technical capacity, and promote inter-state knowledge sharing to standardise and enhance climate budgeting practices. “ This could aid the states in entrenching climate change action within the development frontier and contribute to strong, sustainable growth” RBI said.
Besides it has called for a multi-pronged approach of refining the process of appointment of state finance commission, data collection and dissemination and improving the quality of the SFC reports is called for.
Overall, while the state governments have made progress in fiscal consolidation, there is scope for further improvement in expenditure
efficiency, outcome and climate/green budget, uniform and more transparent data reporting and use of modern techniques like artificial
intelligence and machine learning. “ Concerted efforts by States in these areas will pave the way for higher economic growth with macroeconomic stability” RBI said.