States need to rationalise subsidy spend, says RBI study

RBI study says states need to contain subsidies l;ike cash transfers

India’s states need to rationalise their subsidy spending to make way for more productive expenditures, the Reserve Bank of India has said

Pointing to the new cash transfer schemes announced by several states, Delhi being the latest addition, the central bank said “an area of incipient stress is the sharp rise in expenditure on subsidies, driven by farm loan waivers, free/subsidised services (like electricity to agriculture and households, transport, gas cylinder) and cash transfers to farmers, youth and women.”

"States need to contain and rationalise their subsidy outgoes, so that such spending does not crowd out more productive expenditure," RBI’s State Finances: A Study of Budgets 2024-25 report released on December 19 said.

The central bank has been warning of elevated levels of state governments’ debt.

The debt to GDP ratio of states is expected to rise to 28.8 percent in FY25 from 28.5 percent in the previous year.

While this is lower than pandemic levels of 31 percent, it is much higher than 26 percent levels prior to the pandemic.

“Following the Centre’s strategy outlined in the Union Budget 2024-25, States with elevated debt levels may establish a clear, transparent and time-bound glide path for debt consolidation, that is aligned with macroeconomic objectives such as debt sustainability, economic resilience, and fiscal flexibility,” the report said.

Rationalising centrally sponsored schemes

It also stressed on the need for rationalisation of centrally sponsored schemes, which were taking resources away from states to focus on their own spending.

“Too many central government schemes reduce flexibility of state government spending and dilute the spirit of cooperative fiscal federalism,” it said.

Moneycontrol has reported that the Centre’s spending on centrally sponsored schemes shrunk post pandemic.

The share of central sector schemes increased to 32.2 percent in FY24 from 27.4 percent in FY18, while the share of centrally sponsored schemes went down to 10.5 percent from 13.3 percent earlier, a Moneycontrol analysis of the past few year’s budgets had shown.