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The Reserve Bank of India states that popular state schemes such as farm loan waivers, free power, and transport may limit the resources available for social and economic infrastructure.

What progress have state governments made in fiscal consolidation?

According to the RBI's 'State Finances: A Study of Budgets of 2024-25', state governments have made good progress towards fiscal consolidation.

States have kept their aggregate gross fiscal deficit below 3% of GDP for three years in a row (2021-2024). States have also kept their revenue deficits low, at 0.2% of GDP in 2022-23 and 2023-24. This has allowed them to increase capital spending and also improve the quality of expenditure.

Case Study: Welfare Services v/s Financial Health of the Delhi Government

The Delhi government provides various free and subsidized schemes, such as reduced electricity and water bills, free bus rides for women, free public education, and subsidized treatment in government hospitals.
Budget expenditure increased from Rs 30,940 crores in 2014-15 to Rs 76,000 crores in 2024-25.
GSDP increased from Rs 4.95 lakh crores in 2014-15 to Rs 11.8 lakh crores in 2024-25.
Debt-to-GDP ratio has dropped from 6.4% in 2013-14 to 3.9% in 2023, one of the lowest in India.
The ratio of interest payment to revenue receipts has also declined from 11.20% in 2012-13 to 5.21% in 2022-23.
The per capita income in Delhi has also increased from ₹2.47 lakh in 2014-15 to ₹4.62 lakh in 2023-24.

Report suggest states should handle the rising expenditure on subsidies

The report suggests states to rationalise and manage their subsidy expenditures. It indicates that if subsidy spending is not controlled, it may limit the resources available for more productive spending on infrastructure, education, and healthcare.

States could save money for critical development projects by eliminating unnecessary subsidies.

Status of State Debt

While state debt as a percentage of GDP has declined from 31% in 2021 to 28.5% in 2024, it remains higher than the pre-pandemic level of 25.3% in 2019.

The RBI highlights that the high debt burden, combined with outstanding guarantees and rising subsidies, requires states to continue to prioritise fiscal consolidation to ensure long-term financial health.

Recommendations to improve state finances

States should prioritise more productive areas such as education, healthcare, and infrastructure over excessive subsidies.

States require a clear, transparent strategy for reducing debt levels in accordance with the Fiscal Responsibility and Budget Management (FRBM) guidelines.

Outcome budgeting should be implemented to link spending to measurable outcomes, ensuring accountability and focussing on impactful projects.

To ensure long-term development, states should include climate action in their fiscal plans.

Better fiscal data reporting and transparency can help to improve risk assessment and lower borrowing costs.

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Source:

Business Standard

PRACTICE QUESTION

Q.Critically analyse the implications of rising subsidies on state finances, and how can state governments balance welfare spending with developmental and capital expenditure.(150 words)