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Soaring subsidy bills of states may constrain spending on development: RBI

MUMBAI: The Reserve Bank of India has expressed concerns over the rising subsidies in several states, notwithstanding the gains from fiscal consolidation. After contracting during 2019-20, state expenditure on subsidies has grown by 12.9% and 11.2% during FY21 and FY22, respectively.
“The rising expenditure on non-merit subsidies may raise the share of committed expenditure in states’ spending, constraining the fiscal space available for developmental and capital spending,” the RBI said in its financial stability report. It also pointed to subsidies cornering a larger share of revenue expenditure- from 7.8% in FY 20 to 8.2% last year.
The RBI’s statement comes at a time when economists have voiced concerns over the ability of state governments to achieve the budget estimate of Rs 6.9 lakh crore of capital expenditure which would be around 2.6% of gross domestic product.
Power forms major chunk of subsidies
Recently, PM Narendra Modi also slammed states and political parties offering “revdis” or freebies, and described his opponents as “enemy of the taxpayer”.
The RBI’s financial stability report did not elaborate on the kind of subsidies the states have been paying out but power remains one of the biggest components with the outgo on free water not adequately budgeted for. The Centre has concerns over the states not adequately providing for electricity subsidies in the budget, resulting in large outstanding for generation companies.
According ICRA, 18 states had budgeted their capital outlay at Rs 6.2 lakh crore in FY23, 37.8% higher than the Rs 4.5 lakh crore in FY22. However, in H1FY23, the outlay increased to Rs 1.59 lakh crore from Rs 1.56 lakh crore last year. The increase in state government fiscal assistance has resulted in the share of subsidies in revenue expenditure rising from 7.8% in FY20 to 8.2% in FY22.

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