Friday, December 30, 2022

Rising state subsidy costs could limit investment on development: RBI

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


MUMBAI: Despite the benefits of fiscal consolidation, the Reserve Bank of India has expressed concern regarding the rising subsidies in several states. Subsequent to contracting during 2019-20, state consumption on endowments has become by 12.9% and 11.2% during FY21 and FY22, separately.

In its financial stability report, the RBI stated, "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." Subsidies also dominated a larger portion of revenue expenditure, rising from 7.8% in FY 20 to 8.2% in FY 2017.

The RBI's statement comes at a time when economists are worried about whether or not state governments will be able to spend the estimated Rs 6.9 lakh crore on capital, which would be about 2.6% of GDP.

Power accounts for a significant portion of subsidies. PM Narendra Modi recently criticized states and political parties for providing "revdis," or freebies, and referred to his opponents as "enemies of the taxpayer."

Although the RBI's financial stability report did not go into detail about the kinds of subsidies that the states have been providing, power continues to be one of the most important components, and the expenditures for free water have not been adequately budgeted for. The Center is concerned that the states' budgets do not adequately cover electricity subsidies, leaving generation companies with significant unpaid bills.

18 states had budgeted capital expenditures of Rs 6.2 lakh crore in FY23, 37.8 percent more than in FY22, according to ICRA. Be that as it may, in H1FY23, the expense expanded to Rs 1.59 lakh crore from Rs 1.56 lakh crore last year. The expansion in state government financial help has brought about the portion of appropriations in income consumption ascending from 7.8% in FY20 to 8.2% in FY22.

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