The central bank further raised alarm over rising subsidies, which have become a significant source of fiscal stress with key
The Reserve Bank of India (RBI) has highlighted that Indian state governments need to establish clear and time-bound plans for fiscal consolidation in a report on Thursday, as per Reuters. The central bank also emphasised the requirement for uniform and transparent reporting of liabilities in light of elevated debt levels.
In its State Finances: A Study of Budgets 2024-25 report, the RBI further underlined the importance of improving expenditure efficiency. The report suggested the adoption of outcome-based and climate-responsive budgets to optimise spending.
The central bank further raised alarm over rising subsidies, which have become a significant source of fiscal stress. Key drivers of such stress include farm loan waivers and free or subsidized services such as electricity, transportation, gas cylinders, and cash transfers to specific groups like 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 report said.
The report showed that the total outstanding liabilities of Indian states have slightly improved and declined to 28.5 per cent of gross domestic product (GDP) by the end of March 2024 from 31 per cent in March 2021. However, it is still above the pre-pandemic level of 25.3 per cent which was recorded at the end of March 2019.
"The high level of debt calls for a credible roadmap for debt consolidation," the report said.
It also recommended that states should align their fiscal strategies with national objectives such as debt sustainability, economic resilience and fiscal flexibility.
The RBI report also noted that due to the overwhelming number of centrally-sponsored schemes are responsible for reducing spending flexibility. It said that it also undermines fiscal federalism.
The central bank suggested to rationalise these schemes to free up budgetary resources for state-specific needs and ease the fiscal burden on both state and federal governments.
The debt-to-GDP ratio of states is expected to rise to 28.8 per cent in FY25 from 28.5 percent in the previous year. this fundamental metric is used for evaluating India's capacity to manage its debt burden effectively and maintain overall economic stability.