MUMBAI: The Reserve Bank of India (RBI) has said too many central government schemes are diluting the spirit of co-operative fiscal federalism, reducing the flexibility of states in their spending.
An RBI report on state finances -- a study of state budgets 2024-25 -- released Thursday further said the persistent high level of subnational debt of the states calls for a credible roadmap for debt consolidation.
“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 states,” the report said, adding “too many Central schemes are diluting the spirit of co-operative fiscal federalism and reduce the flexibility of states in their spending.”
Disbursement under the central schemes ranged between Rs 11,000 and Rs 15,000 crore in fiscals 2021 and 2022, but surged to Rs 81,195 crore in fiscal 2023 and further to Rs 1,09,554 crore in 2024, report said.
These loans accounted for 14.4 percent of the consolidated states’ capital outlay in fiscal 2024. Even after excluding these interest-free loans from the Centre, there has been a steady increase in capital outlays of the states since fiscal 2024, the report added.
The Union Budget for fiscal 2025 has increased the allocation under the long-term interest free loans to support states to Rs 1.5 trillion from Rs 1.3 trillion in the previous year. Additionally, the Centre has proposed to introduce the Purvodaya plan aimed at all-round development of the Eastern states of Bihar, Jharkhand, Bengal and Odisha as well as Andhra.
Following the Centre’s strategy outlined in the Budget 2025, 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.
Stating that uniform reporting of contingent liabilities and off-budget borrowings by states is important, the report said consistent reporting of off-budget borrowings will enhance fiscal transparency and discipline with potential benefits like lower borrowing costs.
Meanwhile, on the states’ fiscal numbers, the report said states have contained their consolidated gross fiscal deficit within 3 percent of their gross state domestic product and their revenue deficit at 0.2 percent of GSDP in fiscals 2023 and 2024. In 2024-25, the states have budgeted at 3.2 percent.
There was also a marked improvement in the quality of expenditure, with capital expenditure rising from 2.4 percent of GSDP in fiscal 2022 to 2.8 percent in fiscal 2024 and budgeted at 3.1 percent for fiscal 2025.
States' total outstanding liabilities also declined from 31.0 percent of GSDP at end March 2021 to 28.5 percent at end March 2024 but remain above the pre-pandemic level of 25.3 percent at end March 2019.