RBI Advises States To Urgently Review Outgoes On Subsidies

In fiscal 2024, States contained their gross fiscal deficit at 2.9% of the GDP, within the Fiscal Responsibility Legislation limit of 3%. This was a marginal increase from the level witnessed a year ago, with substantial inter-State variations, according to the latest report on State finances.

Expenditure quality improved further with capital outlay increasing to 2.6% of GDP in FY24 from 2.2% in fiscal 2023. In the current financial year, States are expected to maintain fiscal discipline with the GFD budgeted at 3.2% of GDP, while continuing to improve expenditure quality.

The overall debt of the States declined to 28.5% of GDP at end-March 2024; however, it remains well above the level of 20% recommended by the Fiscal Responsibility and Budget Management Review Committee (2017).

Further rationalisation of the number of centrally sponsored schemes can make room for undertaking more productive expenditure, the RBI stated. An urgent review of the outgoes on subsidies is warranted to free up resources for increased investment in health, education, agriculture, research and development and rural infrastructure, it said.

Its other recommendations included:

• “Next generation” fiscal rules which combine the medium-term fiscal sustainability objective with short-term flexibility, allowing State governments more maneuverability in dealing with exogenous economic shocks could be considered.

• Data analytics, adoption of machine learning and artificial intelligence can help States further refine their taxation systems and augment tax capacity.

• Greater focus on fiscal transparency and disclosure practices would help States achieve lower deficits and debt ratios.

• Next generation fiscal reforms at the sub-national level must also focus on improving fiscal data generation and dissemination processes.

• Electricity distribution companies continue to remain a drag on State finances, with total accumulated losses at Rs 6.5 lakh crore by 2022-23 (2.4% of GDP) (Power Finance Corporation, 2024). 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.

• States need to expeditiously refine the process of appointment of State Finance Commissions with time-bound release of their recommendations, so that timely and adequate resources are available to the local bodies.