NEW DELHI: The Reserve Bank of India (RBI) on Thursday expressed concern over the rising trend of state subsidies, terming it an “incipient stress” on public finances.
In its report ‘State Finances: A Study of Budgets of 2024-25,’ the central bank called for a rationalisation of subsidies to ensure resources are not diverted from more productive expenditures.
Subsidies provided by states include farm loan waivers, free or subsidised services like electricity for agriculture and households, free transport, gas cylinders, and direct cash transfers to farmers, women, and unemployed youth.
Tool to woo voters
These measures, often rebranded as “freebies” in political discourse, are increasingly being used by political parties to woo voters, particularly during election seasons.
“Such spending could crowd out critical resources and hinder the states’ ability to invest in essential social and economic infrastructure,” the RBI report noted, adding that high debt-to-GDP ratios, growing outstanding guarantees, and the rising subsidy burden necessitate a deeper commitment to fiscal discipline.
Poll gains is priority
The RBI’s concerns highlight a troubling trend: political parties prioritising short-term electoral gains over long-term economic stability. Lavish pre-election promises, such as farm loan waivers and free electricity, often disregard fiscal prudence, leaving states to grapple with strained finances once the polls are over.
“An urgent review of subsidy expenditures is essential to free up resources for investment in health, education, agriculture, research and development, and rural infrastructure,” the RBI said. These areas, it argued, offer sustainable solutions for job creation and poverty reduction.
Challenges persist
Despite these pressures, the RBI acknowledged commendable progress in fiscal consolidation by state governments. States have kept their aggregate gross fiscal deficit below 3 per cent of GDP for three consecutive years (2021-22 to 2023-24) and managed to restrict revenue deficits to 0.2 per cent of GDP in 2022-23 and 2023-24.
This fiscal prudence has enabled states to scale up capital expenditure and improve spending quality. However, the overall debt of states, at 28.5 per cent of GDP as of March 2024, remains significantly above the 20 per cent level recommended by the Fiscal Responsibility and Budget Management (FRBM) Review Committee in 2017.
Fiscal health
To bolster fiscal health, the RBI suggested using data analytics, machine learning, and artificial intelligence to refine tax systems and improve collection efficiency. It also urged states to increase non-tax revenue by revising user charges for services like power, water, and transport.
As state governments continue to grapple with balancing fiscal discipline and political commitments, the RBI’s message is clear: unchecked populism risks undermining economic stability. Whether states will heed this warning or persist in their pursuit of electoral gains at any cost remains to be seen.
