State budgets that prioritize welfare-oriented schemes may hamper infra investment: RBI

New Delhi: The Reserve Bank of India (RBI) on Tuesday said states’ 2024-25 budgets may disrupt important infrastructure investments such as welfare-focused schemes. The central bank has also been asked to focus on infra, the RBI article said. “Furthermore, fiscal space exists for capital growth in FY25 H2, aided by strong tax revenues and restrained expenditure,” the RBI article said, adding that the views expressed in the article are those of the authors and do not represent the position of the RBI.

According to an article in RBI’s December Bulletin, the 2024-25 budgets of many states have introduced measures such as free electricity, transport, and monetary allowances, which could divert resources from essential social and economic infrastructure projects. “Total fiscal deficit as a percentage of budget estimates narrowed in FY25 compared to April-September FY24, supported by stronger tax collections, lower revenue expenditure growth, and lower capital outlay,” it said.

“States such as Haryana, Punjab, Maharashtra, and Jharkhand announced welfare schemes, including free electricity for agriculture, allowances for unemployed youth, and monetary assistance for women. However, such spending may compromise long-term development priorities,” the article noted.

On the revenue side, the Center has benefited from higher tax receipts, both direct and indirect, as well as substantial surplus transfers from the RBI, boosting non-tax revenue. “Despite the slowdown in H1 FY25 due to the conduct of elections, government spending is expected to accelerate in the second half of the fiscal year,” it noted.

The Center has achieved more than half of its budgeted revenue target in H1 FY25 while covering less than 50 per cent of its full-year projected expenditure. “This positions the government favorably to meet the gross fiscal deficit target of 4.9 percent of GDP for FY25,” it said.

It further noted that social sector spending by Indian states has increased sharply, from 5.4% of GDP in 2005-06 to 8.1% in FY25 (Budget Estimates). “Priority on education, health care and other critical services has increased, but the article emphasizes that the effectiveness of this spending depends on achieving tangible results,” the article noted.

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