States' freebies crowd out critical resources needed for economic development, Central Bank report says Subsidies, sometimes termed freebies in political discourse, are being resorted by political parties, specially ahead of polls

New Delhi

A Reserve Bank report on Thursday sounded a note of caution saying sops like farm loan waiver, free power and transport, by states could crowd out their critical resources for social and economic infrastructure.

The RBI's 'State Finances: A Study of Budgets of 2024-25', however, said state governments have made commendable progress towards fiscal consolidation by containing their aggregate gross fiscal deficit within 3 per cent of GDP for three consecutive years (2021-22 to 2023-24), while restricting revenue deficit at 0.2 per cent of the GDP in 2022-23 and 2023-24.

"This has allowed states to scale up their capital spending and improve the quality of expenditure," the report said.

It further said several states have announced sops pertaining to farm loan waiver, free electricity to agriculture and households, free transport, allowances to unemployed youth and monetary assistance to women in their Budget for 2024-25.

"Such spending could crowd out the resources available with them and hamper their capacity to build critical social and economic infrastructure," it said.

The report said an area of incipient stress is the sharp rise in expenditure on subsidies, driven by farm loan waivers, free/subsidised services (like electricity to agriculture and households, transport, gas cylinder) and cash transfers to farmers, youth and women.

As per the RBI study, high debt-GDP ratio, outstanding guarantees and the increasing subsidy burden require states to persevere with fiscal consolidation while laying greater emphasis on developmental and capital spending.