RBI's Concerns Over State Spending

The Reserve Bank of India (RBI) has expressed its concern over the increasing trend of states announcing farm loan waivers, free power, and cash transfers. These measures, while politically popular, are seen as potentially detrimental to long-term fiscal health and infrastructure development.

RBI's report on state finances highlights that since 2018-19, state subsidies have grown 2.5 times to over Rs 4.7 lakh crore. This growth in subsidies, combined with high debt-GDP ratios and outstanding guarantees, necessitates a focus on fiscal consolidation and increased capital spending.

While acknowledging the efforts towards fiscal consolidation, the RBI pointed out the high revenue expenditure to capital outlay (RECO) ratio in several states. This trend, particularly in states like Punjab, Puducherry, Kerala, and Delhi, indicates a significant portion of revenue expenditure is directed towards non-asset creating activities, making it difficult to reduce.

The RBI emphasized the need for states to prioritize capital expenditure to ensure job creation and demand generation, especially post-Covid. Between 2021-22 and 2024-25, RECO is estimated to have declined from 6.3 to 5.2, with states like Manipur, Gujarat, and Sikkim & Arunachal Pradesh showing better ratios.

The report also noted that capital outlays have more than doubled from Rs 4.1 lakh crore to Rs 9.2 lakh crore since 2020-21, with a significant portion directed towards transport, irrigation, and water supply. The RBI's call for rationalizing subsidies and focusing on capital expenditure is crucial for sustainable economic growth and development.