The Reserve Bank of India (RBI) has raised concerns over the growing expenditure on subsidies, including farm loan waivers and cash transfers. A study released on Thursday advises states to rationalize these expenses.
The report, “State Finances: A Study of Budgets of 2024-25,” highlights the strain caused by subsidies such as free or subsidized services like electricity, transport, and gas cylinders, along with cash transfers to various groups like farmers, youth, and women.
Many states, including Delhi, have introduced financial assistance programs recently. Delhi’s Chief Minister Arvind Kejriwal, ahead of the 2025 Assembly elections, launched the ‘Mukhya Mantri Mahila Samman Yojna,’ which promises Rs 1,000 per month to women, with plans to increase it to Rs 2,100 if the AAP is re-elected.
The RBI’s report emphasizes that states must rationalize their subsidy outgo to avoid hindering productive spending. It also notes that excessive subsidies can crowd out other essential expenditures.
On state debt, the RBI noted that while the overall debt of states decreased from 31.8% of GDP in 2004 to 28.5% in 2024, it remains higher than the recommended 20% target. The RBI urges states to create a clear and time-bound roadmap for debt consolidation.
The report also criticizes the central government’s schemes, which it says limit state governments’ fiscal flexibility and undermine cooperative federalism. Rationalizing centrally sponsored schemes (CSS) would provide states with more budget space and reduce fiscal pressure.
RBI stresses the importance of reliable data for assessing fiscal risks and calls for better reporting of off-budget borrowings to ensure transparency and lower borrowing costs.
To improve public expenditure efficiency, the report suggests linking spending to measurable outcomes, enhancing accountability, and focusing on resource allocation that yields maximum development impact. Additionally, states are encouraged to prioritize climate budgeting to integrate environmental action into fiscal planning.
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