What’s in Today’s Article?

• Introduction (Context of the Article)
• RBI’s Report (Key Concerns, Recommendations, Significance, etc.)
• Conclusion

Introduction:

• RBI has raised concerns over the rising expenditure of states on subsidies and highlighted the need for rationalization to ensure fiscal sustainability.
• These observations were made in the report titled "State Finances: A Study of Budgets of 2024-25", released recently.
• The report sheds light on pressing fiscal challenges such as subsidy rationalization, debt consolidation, and expenditure efficiency.

Key Concerns Raised by the RBI:

• Subsidy Expenditure:
  • States have significantly increased spending on subsidies, including:
    • Farm loan waivers
    • Free or subsidised services (electricity, transport, gas cylinders)
    • Cash transfers to farmers, youth, and women
• Such subsidies often crowd out spending on critical infrastructure and developmental projects.
• Rising Subnational Debt:
  • While state debt as a percentage of GDP declined from 31.8% in 2004 to 28.5% in 2024, it remains above the 20% threshold recommended by the Fiscal Responsibility and Budget Management (FRBM) Review Committee (2017).
  • Persistent high debt levels necessitate a transparent and time-bound roadmap for debt consolidation.
• Cooperative Fiscal Federalism:
  • The proliferation of Centrally Sponsored Schemes (CSS) reduces flexibility in state spending.
  • Rationalising CSS can provide budgetary space for states to address specific local needs while reducing fiscal stress for both the Union and state governments.

Recommended Measures:

• Rationalisation of Subsidies:
  • States need to contain and streamline subsidy outgoes to prioritise more productive expenditure areas such as education, healthcare, and infrastructure.
  • Example: Delhi’s Mukhya Mantri Mahila Samman Yojna, offering monthly financial assistance to women, is one of many schemes contributing to rising subsidy burdens.
• Debt Consolidation:
  • Adopting a clear and transparent debt consolidation strategy aligned with macroeconomic goals can ensure debt sustainability and economic resilience.
• Efficiency in Public Expenditure:
  • Outcome budgeting (A budgeting method where expenditure is linked to measurable outcomes, ensuring resources are used efficiently) is proposed to link spending with measurable outcomes, ensuring:
    • Accountability in resource allocation
    • Focus on high-impact developmental projects
    • Greater public trust and transparency
• Climate Budgeting:
• States are urged to adopt climate budgeting to integrate climate action into fiscal planning, ensuring sustainability in resource use.
• Enhancing Fiscal Transparency:
  • Reliable, comprehensive, and timely fiscal data is essential for better risk assessment.
  • Transparent reporting of off-budget borrowings can reduce borrowing costs and improve fiscal discipline.
    • Off-Budget Borrowings: Loans taken by government-related entities not reflected in the official budget, which can obscure fiscal liabilities.

Significance of the Recommendations:

• Rationalising Subsidies:
  • Reduces fiscal burden and ensures resources are channelled toward long-term development.
  • Frees up funds for sectors such as infrastructure and education, fostering economic growth.
• Debt Consolidation:
  • Aligning state debt levels with FRBM Committee recommendations can strengthen fiscal stability.
  • Transparent debt strategies boost investor confidence and lower borrowing costs.
• Cooperative Federalism:
  • Rationalising CSS aligns state and central objectives, reducing duplication and inefficiency in spending.
• Climate Action:
  • Climate budgeting promotes sustainable development, addressing both ecological and economic goals.
• Fiscal Discipline and Transparency:
  • Enhanced reporting standards improve decision-making and foster public accountability.

Conclusion:

• The RBI’s recommendations underscore the importance of rationalising subsidies, improving expenditure efficiency, and ensuring fiscal transparency.
• These steps are essential for fostering sustainable development while addressing mounting fiscal challenges.
• By implementing such measures, states can strike a balance between meeting immediate social needs and achieving long-term economic resilience.