RBI warns states & the center that rising subsidy expenditure could reduce money left over for productive uses -Story by TCA Sharad Raghavan
New Delhi: The Reserve Bank of India (RBI) has voiced concern about the rising levels of subsidies that state governments are promising, saying this was an “area of incipient stress” that could crowd out other more productive expenditure. Another area of concern the central bank pointed out was a persistent high level of debt among the states.
The RBI Thursday released its ‘State Finances: A Study of Budgets’ report for the financial year 2024-25, in which it analysed budgets presented for the year by all states and UTs with legislatures. The report also contains recommendations for the way forward.
“First, an area of incipient stress is the sharp rise in expenditure on subsidies, driven by farm loan waivers, free/subsidised services (like electricity to agriculture and households, transport, gas cylinder) and cash transfers to farmers, youth and women,” the RBI noted.
“States need to contain and rationalise their subsidy outgoes, so that such spending does not crowd out more productive expenditure,” the central bank added.
Data shows that the bulk of the subsidy expenditure by states has increasingly been concentrated among fewer states, and the major driver of this trend is the significant increase in Tamil Nadu’s subsidy spending.
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Total subsidy expenditure of all states increased from Rs 2.13 lakh crore in 2019-20 to a budgeted Rs 4.71 lakh crore for 2024-25, a 121 percent increase. Of this, about 65 percent of the subsidy expenditure was accounted for by seven states in 2019-20—Maharashtra, Karnataka, Chhattisgarh, Tamil Nadu, Gujarat, Uttar Pradesh and Madhya Pradesh.
In 2024-25, just five states are expected to account for 65 percent of total subsidy expenditure of all states—Tamil Nadu, Chhattisgarh, Karnataka, Madhya Pradesh and Gujarat.
Within this, Tamil Nadu’s share in total subsidy expenditure has shot up from 9.5 percent in 2019-20 to 31 percent in 2024-25. In other words, Tamil Nadu’s subsidy expenditure now accounts for just a shade less than one-third of the total subsidy expenditure of all states. An important caveat here is that data for Maharashtra, which accounted for 13 percent of total subsidy expenditure in 2019-20, is not available for 2024-25. However, while this exclusion of Maharashtra would certainly affect the relative shares of other states, absolute figures and affordability metrics of Tamil Nadu’s subsidy expenditure nevertheless highlight significant concerns.
Tamil Nadu’s subsidy expenditure ballooned from Rs 20,143.90 crore in 2019-20 to Rs 1.47 lakh crore in 2024-25, a whopping 630 percent increase.
From an affordability point of view, Tamil Nadu’s subsidy expenditure has been around 50 percent of its revenue receipts for the last three financial years. That is, half of the income the state earned from its routine functioning—such as through taxes—went towards subsidy payments.
The other major issue the RBI highlighted in its report was the debt levels of the states, which it said needed to be reduced in a timebound manner. Need to reduce states’ debt levels
“The persistent high level of subnational debt calls for a credible roadmap for debt consolidation,” the RBI has stated. “Following the Centre’s strategy outlined in the Union Budget 2024-25, states with elevated debt levels may establish a clear, transparent and time-bound glide path for debt consolidation that is aligned with macroeconomic objectives such as debt sustainability, economic resilience, and fiscal flexibility.”
Warnings to Centre & stat
The RBI’s suggestions weren’t restricted to the states, either. It has cautioned the Centre about increasing number of centrally-sponsored schemes and how this hampered states’ abilities to spend their money as they choose to.
“Too many central government schemes reduce flexibility of state government spending and dilute the spirit of cooperative fiscal federalism,” the report said. “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.”
Another suggestion to the states was to come up with a uniform way they could report their contingent liabilities—basically loans taken by other bodies but guaranteed by the state governments—and off-budget borrowings.
“Uniform reporting of contingent liabilities and off-budget borrowings by states is important,” the RBI cautioned. “Consistent reporting of off-budget borrowings would enhance fiscal transparency and discipline with potential benefits like lower borrowing costs.”
These outstanding contingent liabilities of the state governments increased from 2 percent of GDP in 2016-17 to 3.9 percent of GDP by March 2023, the latest period for which there is data.
The RBI suggested that the states could adopt ceilings on the amount of contingent liabilities they could take on, in line with the recommendations of the working group on state government guarantees, which submitted its report earlier this year.
(Edited by Nida Fatima Siddiqui)
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