MUMBAI – Indian state governments must have clear and time-bound glide paths for fiscal consolidation with transparent and uniform reporting of liabilities, given the elevated debt levels, the Reserve Bank of India (RBI) said in a report on Thursday.
States should also focus on expenditure efficiency with outcome and climate budgets, the RBI said in its report on State Finances.
The sharp rise in spending on subsidies, driven by farm loan waivers, free or subsidised services like electricity, transport, gas cylinders, and cash transfers to farmers, youth and women, are key areas of incipient stress, the report said.
“States need to contain and rationalise their subsidy outgoes, so that such spending does not crowd out more productive expenditure,” it said.
Indian states’ total outstanding liabilities declined to 28.5% of GDP at end of March 2024 from 31% in March 2021 but remained above the pre-pandemic level. The borrowings stood at 25.3% at end of March 2019, the report showed.
The high level of debt calls for a credible roadmap for debt consolidation, the report said.
Following the strategy outlined in the federal budget 2024-25, states with elevated debt levels should establish a path for debt consolidation that is aligned with macroeconomic objectives such as debt sustainability, economic resilience, and fiscal flexibility, it said.
Meanwhile, too many federal government schemes reduce the flexibility of state government spending and dilute the spirit of cooperative fiscal federalism, the RBI report said.
Rationalisation of centrally-sponsored schemes can free up budgetary space to meet state-specific expenditure needs and reduce the fiscal burden of both the federal and state governments, it said.
(Reporting by Swati Bhat; Editing by Mrigank Dhaniwala)
