NEW DELHI: With reforms fostering overall fiscal sustainability at the subnational level, states need to adopt “next-generation” fiscal rules, time-bound glide paths for fiscal consolidation, and rein in subsidies and freebies, the Reserve Bank of India (RBI) said in a report on Thursday.
State governments contained their consolidated gross fiscal deficit (GFD) within 3% of gross domestic product (GDP) and their revenue deficit at 0.2% of GDP during 2022-23 and 2023-24. In 2024-25, states have budgeted a GFD of 3.2% of GDP, according to the RBI’s ‘State Finances: A Study of Budgets of 2024-25’.
It said states’ total outstanding liabilities declined from 31% of GDP at March-end 2021 to 28.5% at March-end 2024 but remained above the pre-pandemic level of 25.3% at March 2019. The prudential level is 20% for debt-GDP for states.
In view of high debt levels, it said “next generation” fiscal rules which combine the medium-term fiscal sustainability objective with short-term flexibility allowing state governments more manoeuvrability in dealing with exogenous economic shocks could be considered. This would require strengthening of institutions and improvements in fiscal reporting while incorporating the implications of evolving challenges, especially climate change and population aging.
The adoption of Fiscal Responsibility Legislations (FRLs) by state governments along with other tax and expenditure reforms fostered overall fiscal sustainability at the subnational level. “These reforms can be reinforced with “next generation” fiscal rules; the use of data analytics, including machine learning and artificial intelligence; improved data transparency and disclosure practices; and strengthening the institution of State Finance Commissions to deliver public services more effectively and scale up social and physical infrastructure,” it said.
The sharp rise in spending on subsidies, driven by farm loan waivers, free or subsidised services like electricity, transport, gas cylinders, and cash transfers to farmers, youth and women, are key areas of incipient stress, the report noted.
“States need to contain and rationalise their subsidy outgoes, so that such spending does not crowd out more productive expenditure,” it said.
With electricity distribution companies continuing to remain a drag on state finances, it said total accumulated losses were at Rs 6.5 lakh crore by 2022-23 (2.4% of GDP). Initiatives aimed at enhancing productivity, reducing transmission and distribution losses, rationalising tariffs in accordance with the underlying cost of power supply, unbundling the electricity supply industry, and privatising generation and distribution remain critical and would significantly improve the quality of state finances.
It also flagged that too many central government schemes reduce flexibility of state government spending and dilute the spirit of cooperative fiscal federalism. It suggested that rationalisation of centrally sponsored schemes can free up budgetary space to meet state-specific expenditure needs and reduce the fiscal burden of both the Union and the state governments.
It said the state governments have made progress in fiscal consolidation, while there is scope for further improvement.
Source: The Financial Express
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