RBI asks States to have sustained fiscal prudence

State governments contained their consolidated gross fiscal deficit (GFD) within 3% of the gross domestic product (GDP) and their revenue deficit at 0.2% of GDP during 2022-23 and 2023-24, the Reserve Bank of India said in its report on state finances.

In 2024-25, States had budgeted a GFD of 3.2% of GDP.

“The improvement in the quality of expenditure was sustained, with capital expenditure rising from 2.4% of GDP in 2021-22, to 2.8% in 2023-24 and budgeted at 3.1% of GDP in 2024-25,” according to the RBI report.

States’ total outstanding liabilities declined from 31.0% of GDP at end-March 2021 to 28.5% at end-March 2024, but remained above the pre-pandemic level (25.3% at end-March 2019), the RBI said in the report.

State-specific fiscal responsibility legislations (FRLs), along with tax and expenditure reforms, have strengthened their finances over the past two decades, the central bank’s report said.

“In view of high debt levels, contingent liabilities and the rising subsidy burden, State government finances would benefit from the adoption of a risk-based fiscal framework with provisions for counter-cyclical fiscal policy actions; a prudent medium-term expenditure framework; a clear, transparent and time-bound glide path for debt consolidation, including on reporting of outstanding liabilities, off-budget borrowings and guarantees,” the RBI said in the report.

“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. While States’ total outstanding liabilities have been declining, they remain above the pre-pandemic level,” RBI Deputy Governor Michael Debabrata Patra, said In the foreword to the report.

“The report highlights several reforms that would strengthen public finances. It also emphasises the need for sustained fiscal prudence while prioritising growth-enhancing capital spending,” he said.