NEW DELHI: Reserve Bank of India on Thursday flagged its concern over several states announcing farm loan waivers, free power to agriculture and households, free transport and cash transfers to women and youth, cautioning that these spends will lower the funds available to undertake expenditure on building social and physical infrastructure as well as research and development.
RBI’s red flag comes amid a series of schemes being announced targeting women and unemployed youth, with each state going to poll seeking to outdo the other. “High debt-GDP ratio, outstanding guarantees and the increasing subsidy burden require states to persevere with fiscal consolidation while laying greater emphasis on developmental and capital spending,” the report on state finances based on the budget announcements for the current fiscal year said.
Since 2018-19, subsidies given by the states have grown 2.5 times to over Rs 4.7 lakh crore, the budgeted level for the current fiscal year.
While lauding the overall effort towards fiscal consolidation, it pointed to the high revenue expenditure to capital outlay (RECO) ratio in several states. A large part of the revenue expenditure is seen to be going towards non-asset creating spending and is difficult to reduce given that it includes interest payments, salary and pension bills and the politically sensitive issue of subsidies. Punjab has the highest RECO of 17.1 this fiscal – which is more than three times the national average – followed by Puducherry (14.1), Kerala (10.6) and Delhi (10.3), RBI concluded.
Post-Covid the Centre has been seeking to focus on increasing capital outlays to ensure job creation and generation of demand for inputs and reducing the proportion of revenue expenditure. Between 2021-22 and 2024-25, RECO is estimated to have declined from 6.3 to 5.2 with Manipur having the best ration (2.4), followed by Gujarat (2.9) and Sikkim & Arunachal Pradesh (3.1), a report on state budgets released by RBI said. For all the states, since 2020-21, expenditure has increased 68% to Rs 57.6 lakh crore (budgeted for this year), while capital outlay has more than doubled from Rs 4.1 lakh crore to Rs 9.2 lakh crore.
The report said that for the states, a large chunk of the capital outlays have gone towards transport, irrigation and water supply.
While capital expenditure was estimated at 2.5% of GDP during the last fiscal year, the Centre’s long-term loan for capex too has played a part as it accounted for 14.4% of the states’ capital outlays. In some cases, such as Andhra Pradesh, these loans accounted for over half the outlays in FY23 and FY24, while in Bihar it was around a quarter of the outlays of the state. While states have been sticking to fiscal responsibility legislations, RBI said the need is to focus on capital expenditure.