State govt fiscal situation improves; sops may crowd out resources

Market borrowing surged 32.8% in FY24, RBI report says

State governments have made commendable improvement in fiscal consolidation by containing their aggregate gross fiscal deficit (GFD) within 3 per cent of gross domestic product (GDP) for three consecutive years (2021-22 to 2023-24), Reserve Bank of India (RBI) report on “State Finances — A Study of Budgets of 2024-25”, said. The states have also restricted revenue deficit to 0.2 per cent of GDP in 2022-23 and 2023-24.

 

In 2023-24, states contained their GFD at 2.9 per cent of GDP, within the Fiscal Responsibility Legislation (FRL) limit of 3 per cent. States have budgeted a GFD of 3.2 per cent of GDP in the financial year 2024-2025 (FY25), a marginal increase from the level witnessed a year ago, with substantial inter-state variations.

 

At the same time, sops like free electricity, and farm loan waiver could crowd out the resources available with them and hamper their capacity to build critical social and economic infrastructure, the report noted.

 

“Persistently high debt levels, contingent liabilities, and the rising subsidy burden emphasise the need for further fiscal prudence while prioritising growth-enhancing capital spending,” the report said.

 

It said that improvement in the quality of expenditure was sustained, with capital expenditure rising from 2.4 per cent of GDP in 2021-22 to 2.8 per cent in 2023-24, and is budgeted at 3.1 per cent of GDP in 2024-25.

 

“The analysis shows that state governments have demonstrated fiscal prudence by containing their consolidated gross fiscal deficit and revenue deficit, while continuing to improve the quality of expenditure,” RBI deputy governor Michael Patra said in the foreword for the report.

 

States' total outstanding liabilities declined from 31.0 per cent of GDP at end-March 2021 to 28.5 per cent at end-March 2024 but remain above the pre-pandemic level of 25.3 per cent (at end-March 2019).

 

The report observed that high debt-GDP ratio, outstanding guarantees, and the increasing subsidy burden require states to persevere with fiscal consolidation while laying greater emphasis on developmental and capital spending.

 

Citing provisional data for April-October of FY25, the report noted that states’ GFD increased to 54.6 per cent of BE (Budget estimates) from 48.7 per cent in the corresponding period of FY24.

 

In FY25, growth in tax revenues remained stable while there was a contraction in non-tax revenue and grants from the Centre. The pace of expansion in SGST (state goods and services tax) – the largest driver of tax revenue – softened. While stamp and registration fees witnessed robust growth, sales tax displayed signs of recovery, the report said.

 

Moreover, states’ dependence on market borrowing has increased in recent years, which is budgeted at 79 per cent in FY25. On average, market borrowings financed slightly more than half of the consolidated GFD of states till 2016-17.

 

In 2023-24, gross market borrowings of states and Union Territories (UTs) surged by 32.8 per cent to Rs 10.07 trillion, in line with their higher GFD. All major states except Gujarat, Jharkhand, Madhya Pradesh, and Punjab saw an increase in market borrowings in 2023-24.

 

“Chhattisgarh, Karnataka, Rajasthan, Goa, and Uttar Pradesh, which reduced their borrowings in the preceding two years, together contributed over 50 per cent of the incremental gross borrowings in 2023-24,” the report said. 

            Overall Picture