Reserve Bank of India advises states to be more cautious in managing finances

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A study by the Reserve Bank of India on state finances has lauded states for containing consolidated fiscal deficits, but also urged them to adopt the “golden rule” of funding current expenditure from current revenues and using borrowed funds for Capital expenditures.

The central bank has also aggressively provided excessive subsidies and cash transfers to farmers, youth and women.

“While progress in improving national finances post-pandemic is to be commended, lasting fiscal consolidation must mark the way

The Reserve Bank said this in its assessment of state government finances in a report titled “State Finances: Budget Study 2024-25” released on Thursday.

Acknowledging the improvement in the fiscal position of state governments, the study noted that the consolidated gross fiscal deficit (GFD) of Indian states fell from an average of 4.3% of GDP between 1998-99 to 2003-04 to 2.7% of GDP between 2004-05 and Period 2023-24.


Overall country debt fell from 31.8% of GDP at end-March 2004 to 28.5% of GDP at end-March 2024; however, it remains well above the 20% level recommended by the Fiscal Responsibility and Budget Management (FRBM) Review Committee in 2017 .

Through farm loan waiver, provision of free/subsidized services like electricity, transport, gas cylinders to agriculture and households, and cash transfer to farmers, youth and women. “States need to control and rationalize their subsidy spending so that such spending does not crowd out more productive spending,” the central bank advised states.

The central bank also suggested that improving the efficiency of public spending through the implementation of results-based budgeting, such as linking spending to measurable outcomes, to promote accountability and targeted use of resources is critical for maximum development impact. This approach would prioritize allocation to sectors with meaningful economic and social benefits, the report said.

Additionally, results-based reporting empowers citizens to understand how their tax dollars are spent, thereby fostering public trust, encouraging citizen engagement and improving the quality of spending.

It emphasizes the need for countries to strengthen data systems, build technical capacity and promote knowledge sharing among countries to standardize and strengthen climate budgeting practices. “This can help states bring climate change action to the forefront of development and contribute to strong, sustainable growth,” the RBI said.

In addition, a multi-pronged approach is also required to improve the appointment procedures of the National Finance Commission, data collection and dissemination, and improve the quality of CSRC reports.

Overall, while state governments have made progress on fiscal consolidation, there is still room for further improvement in spending

Efficiency, results and climate/green budgeting, harmonized and more transparent data reporting and the use of modern technologies such as manual labor

Intelligence and machine learning. “Joint efforts by countries in these areas will pave the way for higher economic growth and macroeconomic stability,” the RBI said.

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