States’ Consolidated Fiscal Deficit Widens to 3.3% in FY25: RBI Analysis
The Reserve Bank of India’s recent study highlights a concerning trend in state finances. The consolidated fiscal deficit of states has increased to 3.3% of GDP in FY25, up from 3% for the previous three fiscals. This shift raises crucial questions about the sustainability of state budgets as the country navigates post-pandemic recovery.
Key Findings from the RBI Report
– Elevated Liabilities: States’ outstanding liabilities remain high, estimated at 29.2% of GDP by March-end 2026.
– Increased Borrowing: The widening deficit is largely attributed to higher borrowing via the central government’s 50-year interest-free loans under the Special Assistance to States for Capital Investment scheme.
– Capital Expenditure Focus: States are maintaining their emphasis on capital expenditure, which is projected to hold steady at 2.7% of GDP for FY24 and FY25, with a planned increase to 3.2% of GDP in FY26.
Demographic Influences on State Finances
The RBI’s analysis points to the impact of demographic changes on state finances:
– Youthful vs. Ageing States: States with a younger population possess a valuable opportunity due to an expanding workforce and better revenue mobilization potential. In contrast, ageing states confront fiscal challenges like shrinking tax bases and increased committed expenditures, necessitating reforms in healthcare, pensions, and workforce policies.
– Balancing Growth and Ageing: Intermediate states must navigate a dual focus on growth while proactively preparing for the implications of an ageing demographic.
Conclusion: Implications for Future Fiscal Health
The widening consolidated fiscal deficit to 3.3% underscores the urgency for states to strategically manage their finances. With outstanding liabilities on the rise and demographic shifts at play, states must prioritize effective borrowing, capital investment, and necessary reforms to bolster their fiscal health and ensure sustainable growth going forward. Addressing these challenges will be crucial for maintaining economic stability and fostering resilience in the face of future uncertainties.