State Finances: A Study of Budgets of 2024-25

Syllabus: GS3/Economy

Context

• The Reserve Bank of India (RBI) released the Report “State Finances: A Study of Budgets of 2024-25”.

Major Highlights

• GFD of States: 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.
• Expenditure: Capital expenditure rose from 2.4% of GDP in 2021-22 to 2.8% in 2023-24 and budgeted at 3.1% of GDP in 2024-25.
• Liabilities: States’ total outstanding liabilities declined from 31.0% of GDP 2021 to 28.5% in 2024 but remain above the pre-pandemic level.
• State-specific Fiscal Responsibility Legislations (FRLs) along with tax and expenditure reforms have strengthened their finances over the past two decades. 

Reasons for Lack of Fiscal Prudence in States:

• Expenditure on Schemes: Sharp rise in expenditure on subsidies, driven by farm loan waivers, free/subsidised services and cash transfers to farmers, youth and women. 
• Lack of Flexibility to States: Too many Central government schemes reduce flexibility of State government spending and dilute the spirit of cooperative fiscal federalism. 
• Lack of Data Availability: Timely availability of reliable and comprehensive data is crucial for fiscal risk assessment of States.
  • Certain definitions in States’ FRLs are often inconsistent with those of the Finance Commissions, the Union Ministry of Finance, and the Reserve Bank.
  • It led to ambiguities in reporting, differential treatments of public account items, non-uniform nomenclature, and underreporting of debt liabilities. 
• Lack of Uniform Reporting: Uniform reporting of contingent liabilities and off-budget borrowings by States is important. 

Recommendations for States: 

• Rationalise Subsidies: States need to rationalise their subsidy outgoes, so that such spending does not crowd out more productive expenditure. 
• Rationalisation of centrally sponsored schemes (CSS) can free up budgetary space to meet State-specific expenditure needs and reduce the fiscal burden of both the Union and the State governments. 
• Policy Framework for Debt Consolidation: States with elevated debt levels may establish a clear and transparent path for debt consolidation that is aligned with macroeconomic objectives. 
• Reporting off-budget Borrowings: Consistent reporting of off-budget borrowings would enhance fiscal transparency and discipline with potential benefits like lower borrowing costs.
• Strengthening of State Finance Commissions is also critical for ensuring adequate and timely fund transfers to local bodies.

Conclusion

• Overall, while the State governments have made progress in fiscal consolidation, there is scope for further improvement in expenditure efficiency.
• Concerted efforts by States will pave the way for higher economic growth with macroeconomic stability.

Source: TH