State Govts Urged To Balance Fiscal Discipline With Economic Flexibility: RBI

(MENAFN- KNN India) New Delhi, 20 Dec (KNN) The Reserve Bank of India (RBI) has urged state governments to adopt advanced fiscal rules and establish time-bound consolidation paths while controlling subsidies and welfare schemes, according to a report released on Thursday.

The central bank's comprehensive study of state finances for 2024-25 highlights both progress and areas requiring attention in state-level fiscal management.

States have demonstrated fiscal discipline by maintaining their consolidated gross fiscal deficit (GFD) within 3 per cent of GDP and revenue deficit at 0.2 per cent of GDP during 2022-23 and 2023-24. However, the projected GFD for 2024-25 shows a slight increase to 3.2 per cent of GDP.

While total outstanding liabilities have decreased from 31 per cent of GDP in March 2021 to 28.5 per cent in March 2024, they remain above both the pre-pandemic level of 25.3 per cent and the prudential threshold of 20 per cent.

The RBI report emphasises the need for "next-generation" fiscal rules that balance medium-term sustainability with short-term flexibility, enabling states to better manage economic shocks.

This advancement would require stronger institutions, improved fiscal reporting, and consideration of emerging challenges such as climate change and aging populations.

The bank advocates for leveraging data analytics, including machine learning and artificial intelligence, while strengthening State Finance Commissions to enhance public service delivery.

A significant concern highlighted in the report is the rising expenditure on subsidies, including farm loan waivers, free utilities, and various cash transfer schemes.

The report specifically notes the strain from electricity distribution companies, whose accumulated losses reached Rs 6.5 lakh crore (2.4 per cent of GDP) by 2022-23.

The RBI recommends comprehensive reforms in the power sector, including reducing transmission losses, rationalising tariffs, and considering privatisation options.

The central bank also addresses the issue of numerous centrally sponsored schemes, suggesting their rationalisation to provide states with greater spending flexibility and reduce fiscal burdens across both federal and state levels.

While acknowledging the progress states have made in fiscal consolidation, the RBI emphasises that there remains substantial room for improvement in overall fiscal management.

(KNN Bureau)

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