Too many Central govt schemes dilute spirit of co-operative fiscal federalism: RBI report

Reserve Bank of India

The Reserve Bank of India’s (RBI) report on state finance said that too many Central government schemes dilute the spirit of co-operative fiscal federalism and reduce flexibility of state government spending.

The report further said rationalisation of centrally sponsored schemes (CSS) can free up budgetary space to meet state-specific expenditure needs and reduce the fiscal burden of both the union and the state governments.

The disbursement under the Centre’s scheme, which ranged between Rs 11,000 to Rs 15,000 crore in the initial two years of 2020-21 and 2021-22, surged to Rs 81,195 crore in 2022-23 and further to Rs 1,09,554 crore in 2023-24, report said.

These loans accounted for 14.4 per cent of the consolidated states’ capital outlay in 2023-24. Even after excluding these interest-free loans from the Centre, there has been a steady increase in capital outlays of the states since 2021-22, the report added.

The Union Budget for 2024-25 has increased allocation under the long-term interest free loans to support states to Rs 1.5 lakh crore in 2024-25 from Rs 1.3 lakh crore in the previous year. Additionally, Centre has proposed to introduce the Purvodaya plan aimed at all-round development of the eastern states – Bihar, Jharkhand, West Bengal, Odisha, and Andhra Pradesh.

Further, the report said that the persistent high level of subnational debt of states calls for a credible roadmap for debt consolidation.

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.

Uniform reporting of contingent liabilities and off-budget borrowings by states is important. Consistent reporting of off-budget borrowings would enhance fiscal transparency and discipline with potential benefits like lower borrowing costs, RBI said in a report.