Chhattisgarh, Tamil Nadu spend most on subsidies, plus other key stats from RBI’s state finances report

According to the RBI, any further provision of non-merit goods and services, subsidies, transfers, and guarantees could push some states' books into a precarious situation.

When it comes to government finances, much of the public attention is focussed on the Centre – understandably so, given the large sums of money involved. The fiscal math of state governments is more difficult to get around – but equally important – considering that states present their budgets over several months.

So it is rather convenient when the Reserve Bank of India publishes its annual study of state budgets. Here, Moneycontrol looks at the central bank's latest such study of the budgets for 2023-24 and examines key aspects of state finances through five charts.

Footing the subsidy bill

A series of state elections were decided a couple of weeks ago and a few more will go to the polls around the time of the Lok Sabha elections. And freebies have re-emerged as a key electoral issue in state elections.

The problem, however, is that there is no legal definition of freebies. Secondly, political parties don't estimate how much their poll promises will cost.

Also Read: Poll panel should ask parties to estimate cost of freebies, says MPC's Ashima Goyal

Perhaps the next best number – one that, admittedly, must be taken with a fair share of salt – is that of subsidies. Of course, there is no point comparing which state shells out the most on subsidies, given the varying sizes of states. Instead, we look at the revised estimates for subsidies in 2022-23 as a percentage of each state's State Domestic Product (SDP).

As per the data, Chhattisgarh and Tamil Nadu were comfortably at the top of the pile, each having spent more than 5 percent of their SDP on subsidies in 2022-23. Rounding off the top five are Punjab, Madhya Pradesh, and Bihar.

A couple of caveats here: one, Maharashtra – whose subsidy bill, at Rs 28,386 crore, was the highest in 2019-20 – has not provided data since then. Two, one must not conflate subsidies with freebies as not all subsidies are bad or distortionary.

Human development

States, often more than the Centre, are responsible for investments into the lives of the public. These include medical and public health, family welfare, water supply, and sanitation.

Unsurprisingly, the National Capital Territory of Delhi leads the pile comfortably when it comes to budgeted spending on these heads in 2023-24 as a percentage of the state's total expenditure. At just over a fifth of its total expenditure, the Delhi government is head and shoulders above the all-state average of 9 percent. A slew of smaller states – also well above the average – are close behind.

While these expenses are health related, a key component of human development is education. Delhi leads the way again in this category, with 21 percent of its expenditure for 2023-24 going on education – significantly higher than the all-state average of 13.3 percent.

In this category, Chhattisgarh, Rajasthan, Himachal Pradesh, and Assam are in the 16-18 percent range.

Committed expenditure

A key constraint for both the Centre and the states is committed expenditure – things they must spend on to ensure the wheels don't fall off. These include servicing debt (interest payments) and paying wages to government employees. The higher these expenses, fewer the resources left to spend on developmental items.

According to the RBI data, topping the list of the highest proportion of revenue receipts spent on interest payments, salaries and wages, and operations and maintenance is the tiny northeastern state of Mizoram at a mind-boggling 95 percent. While it is perhaps not fair to single out Mizoram because its size makes it difficult for it to generate revenue, the rest of the top-five don't have the same excuse.

Assam comes in at sixth, with its expenditure on interest payments and salaries and wages in 2023-24 accounting for 57 percent of its total revenue receipts, even with data for spending on operations and maintenance unavailable. Many states, including Goa, Maharashtra, Meghalaya, Tripura, and West Bengal, did not furnish complete data to the RBI.

Another crucial head of committed expenditure, pensions, is not mentioned even though it is a popular electoral tool to woo voters – and has the potential to destabilise states' finances. But more on that here.

A fine balance

Inevitably, the bottom line always comes down to the sustainability of the finances of state governments. And the legal marker for this is the annual fiscal deficit of 3 percent of each state's SDP.

States' fiscal deficit-to-GDP ratios as per 2023-24 budgets (Source: RBI)

As shown above, the number of states close to or under the 3 percent threshold is greatly exceeded by those above it. According to the RBI, the states need to address "several challenges to fiscal sustainability" in the medium term, including pushing the pedal on asset monetisation to raise non-tax revenue, improvement in tax administration, and prevention of illegal mining by mineral-rich states.

Also Read: India must lower fiscal deficit 'a lot more' to get a higher rating, says S&P

On the expenditure side, the Indian central bank sounded a more dire warning.

"…some States have budgeted for fiscal deficits exceeding 4 percent of GSDP in 2023-24 as against the all-India average of 3.1 percent," the RBI noted. "Any further provision of non-merit goods and services, subsidies, transfers, and guarantees will render their fiscal situation precarious and disrupt the overall fiscal consolidation achieved in the last two years."

Clearly, the states have their task cut out.