'Set Clear Fiscal Consolidation Plans': RBI Tells States | Report

The Reserve Bank of India (RBI) has called on state governments to establish clear and time-bound glide paths for fiscal consolidation, as rising debt levels continue to pose a challenge to India’s fiscal health. The central bank’s report on state finances, released on Thursday, stresses the need for greater transparency in reporting liabilities and for efficient management of state expenditures.

Need for Debt Consolidation Roadmap
The RBI’s report highlights that while Indian states have reduced their total outstanding liabilities to 28.5% of GDP by March 2024, down from 31 per cent in 2021, these debt levels remain higher than pre-pandemic figures. The borrowings were recorded at 25.3 per cent of GDP in March 2019. In light of these elevated debt levels, the RBI recommends that states develop a credible roadmap for debt consolidation aligned with macroeconomic objectives, such as debt sustainability, economic resilience, and fiscal flexibility.

The report urges that states with high debt levels should follow the strategy outlined in the federal budget 2024-25, which emphasizes fiscal prudence and a gradual reduction in debt accumulation.

Subsidy Expenditures and Rising Fiscal Stress
The report also points to the sharp rise in state government spending on subsidies, particularly due to farm loan waivers, free or subsidized services like electricity, transport, gas cylinders, and cash transfers to various groups, including farmers, youth, and women. While these schemes aim to provide support to vulnerable sections of society, they have created fiscal stress.
The RBI advises states to rationalize subsidy outgoings to ensure that such spending does not crowd out more productive expenditures. “States need to contain and rationalize their subsidy outgoes,” the report states, urging a more efficient allocation of resources.

Central Schemes and Reduced State Flexibility
The report also draws attention to the large number of centrally sponsored schemes (CSS) that limit the flexibility of state governments in managing their fiscal affairs. The RBI suggests that rationalizing these schemes would free up budgetary space for states to address their specific needs and reduce the fiscal burden on both federal and state governments.
The share of central sector schemes has increased to 32.2 per cent in FY24, up from 27.4 per cent in FY18, while the share of centrally sponsored schemes has decreased to 10.5 per cent from 13.3 per cent. The RBI recommends that further rationalization of these schemes would enable more productive state-specific expenditure and ease the financial pressure on state governments.

Transparency and Reporting of Liabilities
The RBI emphasizes the importance of uniform reporting of contingent liabilities and off-budget borrowings by states to ensure greater transparency in fiscal management. It also calls for states to finance all current and revenue expenditures from current revenue, while capital expenditures should be financed through borrowings, with a clear plan for consolidation over time.
The RBI’s report paints a clear picture of the fiscal challenges faced by Indian states, urging them to take proactive steps towards managing debt and ensuring efficient expenditure. By establishing a credible debt consolidation roadmap and improving expenditure efficiency, states can reduce fiscal pressures and contribute to India’s broader economic stability.