States need to contain and rationalise subsidy outgoes: RBI report

The concern comes as many states, Delhi being the latest one, have announced monetary assistance schemes in the recent past. Last week, Aam Aadmi Party (AAP) chief Arvind Kejriwal launched the ‘Mukhya Mantri Mahila Samman Yojna’, ahead of the Delhi Assembly election scheduled to be held in February 2025, under which a monthly assistance of Rs 1,000 will be given to women in the national capital. He also promised to raise the amount to Rs 2,100, if re-elected.

“States need to contain and rationalise their subsidy outgoes, so that such spending does not crowd out more productive expenditure,” the report said.

The RBI report also raised concerns over persistently high levels of subnational debt and said there was a need for a credible roadmap for debt consolidation.

The overall debt of states declined from 31.8 per cent of GDP at end-March 2004 to 28.5 per cent of GDP at end-March 2024. However, it remains well above the level of 20 per cent recommended by the Fiscal Responsibility and Budget Management (FRBM) Review Committee (2017).

“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,” it said.

Too many Central government schemes reduce flexibility of state government spending and dilute the spirit of cooperative fiscal federalism, the report stated.

“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,” it said.

The report highlighted that timely availability of reliable and comprehensive data is crucial for fiscal risk assessment of states. It also said that consistent reporting of off-budget borrowings would enhance fiscal transparency and discipline with potential benefits like lower borrowing costs.

The RBI’s report suggested improving public expenditure efficiency by implementing outcome budgeting, i.e., linking spending to measurable outcomes, to foster accountability, and targeted resource use is crucial to generate maximum developmental impact.

Such an approach would prioritise allocations for sectors with meaningful economic and social benefits. Additionally, outcome-based reports provide citizens insight into how their tax money is being utilised, fostering public trust, encouraging civic engagement and enhancing the quality of spending, it said.

It said that states should make the adoption of climate budgeting to integrate climate action into fiscal planning a priority.