RBI’s 2024-25 Report on State Finances

The Reserve Bank of India’s (RBI) recent report, “State Finances: A Study of Budgets of 2024-25,” highlights significant improvements in the fiscal health of state governments post-pandemic, while also identifying areas requiring further attention.

Fiscal Consolidation Achievements

Gross Fiscal Deficit (GFD): States have successfully contained their consolidated GFD within 3% of GDP during 2022-23 and 2023-24, with a budgeted GFD of 3.2% for 2024-25.

Revenue Deficit: Maintained at a low 0.2% of GDP during 2022-23 and 2023-24.

Capital Expenditure: Increased from 2.4% of GDP in 2021-22 to 2.8% in 2023-24, with a further budgeted rise to 3.1% in 2024-25, indicating a focus on developmental spending.

Debt Levels and Liabilities

Outstanding Liabilities: Declined from 31% of GDP at end-March 2021 to 28.5% at end-March 2024, yet still above the pre-pandemic level of 25.3% at end-March 2019.

Contingent Liabilities: State guarantees have risen from 2% of GDP at end-March 2017 to 3.8% by March 2023, posing potential fiscal risks.

Subsidy Expenditures

Rising Subsidies: Significant increases in spending on subsidies, including farm loan waivers and free or subsidized services like electricity, transport, and gas cylinders, have been noted. For instance, 14 states have implemented income transfer schemes for women, totaling approximately ₹2 lakh crore, or about 0.6% of GDP.

Power Sector Concerns

Discom Losses: Power distribution companies have accumulated losses amounting to ₹6.5 lakh crore by 2022-23, equivalent to around 2.4% of GDP, despite multiple reform attempts.

Recommendations for Fiscal Sustainability

Debt Consolidation: The RBI emphasizes the need for a credible roadmap for debt consolidation, particularly for states with elevated debt levels, recommending clear, transparent, and time-bound strategies aligned with macroeconomic objectives.

Expenditure Efficiency: States are urged to enhance expenditure efficiency through outcome-based budgeting and to rationalize subsidies to prevent the crowding out of productive expenditures.

Fiscal Framework Reforms: Adoption of risk-based fiscal frameworks with provisions for counter-cyclical policies, along with strengthening State Finance Commissions, is advised to ensure fiscal discipline and adequate fund transfers to local bodies.

Summary of the news

Key Point	Details
Why in News	RBI released the report “State Finances: A Study of Budgets of 2024-25,” highlighting improved fiscal health of states post-pandemic and challenges such as rising subsidies and contingent liabilities.
Gross Fiscal Deficit (GFD)	Budgeted at 3.2% of GDP for 2024-25, consistent with fiscal consolidation efforts.
Revenue Deficit	Maintained at 0.2% of GDP for 2022-23 and 2023-24.
Capital Expenditure	Increased from 2.4% of GDP in 2021-22 to 2.8% in 2023-24; budgeted at 3.1% for 2024-25.
Outstanding Liabilities	Declined to 28.5% of GDP by March 2024, from 31% in March 2021, but still above pre-pandemic levels (25.3% in 2019).
Contingent Liabilities	State guarantees rose to 3.8% of GDP by March 2023, compared to 2% in March 2017.
Subsidy Expenditures	₹2 lakh crore (0.6% of GDP) allocated for income transfer schemes for women by 14 states.
Power Sector Losses	Discom losses stand at ₹6.5 lakh crore (2.4% of GDP) as of 2022-23.
Recommendations	Emphasized debt consolidation, rationalization of subsidies, and reforms in fiscal frameworks for sustainability.