In December 2024, the Reserve Bank of India (RBI) released a report titled “State Finances: A Study of Budgets of 2024-25”. The report has cautioned about sops like farm loan waiver, free electricity and transport, by state governments could possibly crowd out their resources for social and economic infrastructure development.
- The theme of the report is “Fiscal Reforms by States”. It provides a comprehensive assessment of the finances of State governments for Financial Year 2024-25(FY25) against the backdrop of actual and revised/provisional accounts for FY23 and FY24, respectively.
- The report was prepared in the Division of State Finances in the Department of Economic and Policy Research.
Key Findings:
i.The report has appreciated the state governments for the progress made towards fiscal consolidation by containing their total Gross Fiscal Deficit (GFD) within 3% of Gross Domestic Product (GDP) for 3 consecutive years (2021-22 to 2023-24), while limiting their revenue deficit to 0.2% of GDP in Financial Year 2022-23 (FY23) and FY24.
ii.As per the report, states have estimated a GFD of 3.2% of GDP in FY25 compared to 2.8% of GDP in FY24.
- States like: Arunachal Pradesh (AR), Himachal Pradesh (HP), Sikkim and Tripura have projected high GFD in FY25, whereas large states like: Gujarat and Maharashtra have budgeted lower GFD as percentage of GDP.
iii.The report highlighted that the improvement in the quality of expenditure was stable, with capital expenditure increasing from 2.4% of Gross Domestic Product (GDP) in FY22 to 2.8% in FY24 and budgeted at 3.1% of GDP in FY25.
iv.The report further showed that the overall debt of states decreased from 31.0% of GDP at end-March 2021 to 28.5% of GDP at end-March 2024, but it still remained above the pre-pandemic level of 25.3% at end-March 2019.
v.The report further highlighted the weak financial status of state-owned electricity Distribution Companies (DISCOMs) which have been consistently posing challenges for state government finances.
- It revealed that total outstanding debt of DISCOMs has increased at an average annual rate of 8.7% since 2016-17, increasing from Rs 4.2 lakh crore to Rs 6.5 lakh crore in 2022-23 (2.4% of GDP).
vi.The report has projected that revenue expenditure of states will increase to Rs 47.5 trillion in FY25, which constitutes 14.6% of GDP compared to Rs 39.9 trillion(13.5% of GDP) in FY24.
vii.The report showed that the average buoyancy states’ own tax increased from 0.86 (during FY13 to FY20) to 1.4 (during FY21 to FY25).
- Buoyancy above 1% shows faster revenue collection growth compared to nominal GDP growth.
viii.States’ dependence on market borrowings has surged, accounting for 79% of the GFD in FY25. Gross market borrowings of states and Union Territories increased by 32.8% to Rs 10.07 trillion in FY24.
Recent Related News:
In November 2024, RBI released the report titled “Own Sources of Revenue Generation in Municipal Corporations: Opportunities and Challenges” , emphasized the need for comprehensive reforms in Municipal Corporations (MCs) to enhance their own revenue generation.
- The report analyzed the budgetary data of 232 MCs, covering over 90% of India’s total MCs.
- MCs’ revenue expenditure grew by 13.9% to Rs 1.49 trillion in FY24 from Rs 1.31 trillion in FY23 and Rs 1.23 trillion in FY22.
