RBI asks States to reprioritise expenditure on subsidies to achieve long-term advantages

The Reserve Bank of India (RBI) has asked States including Telangana to reprioritise their expenditure on subsidies being given to different sections for achieving long-term advantages by ensuring that beneficiaries get empowered permanently and forego such benefits.

The apex bank asked the States to ensure that there is a sunset clause for each social sector scheme. Reducing the quantum of subsidies by ensuring that only the deserving receive them will free up resources to invest in health, education, agriculture, R&D and rural infrastructure which will help create more jobs and reduce poverty on a sustainable basis, the bank said in its latest bulletin released recently.

The RBI said as per the latest available data from the Comptroller and Auditor General of India, the State Governments’ expenditure on subsidies grew at 12.9 per cent and 11.2 per cent during 2020-21 and 2021-22 respectively after contracting in 2019-20. Commensurately, the share of subsidies in total revenue expenditure by States has also risen from 7.8 per cent in 2019-20 to 8.2 per cent in 2021-22. There are stark variations among States at a disaggregated level though.

“For instance, Jharkhand, Kerala, Odisha, Telangana and Uttar Pradesh are the top five States with largest rise in subsidies over the last three years,” the report said. The statement assumes significance in the light of a spree of welfare schemes being implemented in the State like Rythu Bandhu, Dalit Bandhu and free power to farm sector round the clock. The Bank expressed concern that the State Governments started delivering a portion of their subsidies in the form of freebies.

While there was no precise definition of freebies, it was necessary to distinguish them from public/merit goods expenditure on which would bring economic benefits such as public distribution system, employment guarantee schemes and states’ support for education and health. On the other hand, provision of free electricity, free water, free public transportation, waiver of pending utility bills and farm loan waivers were often regarded as freebies which would potentially undermine credit culture, distort prices through cross subsidisation eroding incentives for private investment and disincentivise work at current wage rate leading to a drop in labour participation.

Some freebies could benefit poor if properly targeted with minimal leakages but their advantages should be evaluated against the large fiscal costs and inefficiencies they would cause by distorting prices and misallocating resources. This was all the more important at a time when the Centre’s GST compensation payout was set to end in June this year further reducing the headroom available for social sector expenditure.

“In such a situation, a multitude of social welfare schemes in the form of freebies will not only put a heavy burden on the exchequer but will also exert upward pressure on yields if they are financed through market borrowing,” the RBI said.

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