RBI Report on State Finances 2024-25:
The Reserve Bank of India’s (RBI) report, State Finances – A Study of Budgets of 2024-25, highlighted the progress made by state governments in fiscal consolidation, alongside significant challenges such as high debt levels and rising subsidies.
Key Highlights of the Report:
- The average tax buoyancy (responsiveness of tax revenue to changes in the economic growth rate) increased to 1.4 (during 2021-25) from 0.86 (during 2013 to 2020), reflecting improved efficiency in tax collection.
- Higher tax revenues have enabled states to allocate greater funds for asset creation, including highways and bridges.
- States have consistently improved the quality of expenditure, with capital expenditure rising from 2.4% of Gross Domestic Product (GDP) in 2021-22 to 2.8% in 2023-24, and it is budgeted at 3.1% of GDP in 2024-25.
- This indicates a sustained focus on improving the quality of expenditure with growth-enhancing investments.
- States’ gross fiscal deficit is budgeted at 3.2% of GDP for 2024-25, a marginal increase from 2023-24 (2.9%).
- States’ revenue expenditure is projected to increase to Rs 47.5 trillion in FY25, which accounts for 14.6% of GDP as against Rs 39.9 trillion or 13.5% of GDP FY24.
- States’ dependence on market borrowings has surged, accounting for 79% of the gross fiscal deficit (GFD) in FY25.
- Gross market borrowings of states and Union Territories increased by 32.8% to Rs 10.07 trillion in FY 2023-24.
- States’ debt-to-GDP ratio (relative measure of debt compared to economic output) decreased from 31.0% of GDP in March 2021 to 28.5% in March 2024, but remained higher than the pre-pandemic level of 25.3% in March 2019.
- State debt levels exceed the Fiscal Responsibility and Budget Management committee’s recommended debt-to-GDP ratio of 60% by 2023 (with 40% for the Central Government and 20% for State Governments).
- States like Arunachal Pradesh, Himachal Pradesh, Sikkim, and Tripura have forecast high fiscal deficits, while larger economies like Gujarat and Maharashtra have lower deficits as a share of GDP.
- Electricity distribution companies (DISCOMs) continue to strain State finances, with accumulated losses reaching Rs 6.5 lakh crore by 2022-23 (2.4% of India’s GDP).
