States' sops may divert resources away from infra development: RBI article

The report said that several states have announced sops in their 2024-25 Budgets; such spending may divert resources away from critical social and economic infra development

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Sops announced by several states in their 2024-25 Budgets may divert resources away from critical social and economic infrastructure development, an RBI article said on Tuesday.

The gross fiscal deficit as per cent of budget estimate moderated in April-September 2024-25 over H1:2023-24 in case of both Centre and states, primarily on account of robust receipts, deceleration in their revenue expenditure growth and decline in capital expenditure, the article published in December RBI Bulletin said.

This provides fiscal room to them to boost capex in the latter half of 2024-25 which would aid in sustaining the post pandemic gains in expenditure quality and support medium-term growth prospects.

However, several states have announced sops in their 2024-25 Budgets; such spending may divert resources away from critical social and economic infrastructure development, it said.

Many states, including Haryana, Punjab, Maharashtra, and Jharkhand have announced sops including free electricity to agriculture and households, free transport, allowances to unemployed youth and monetary assistance to women.

The views expressed in the article are of the authors and do not represent the views of the Reserve Bank of India, a disclaimer said.

According to the article, the Centre recorded higher tax collections, both direct and indirect, and the buoyancy is expected to continue.

Non-tax revenues of the Centre were boosted by the large surplus transfer by the Reserve Bank, it said.

The government spending, of both Centre and states, was dampened in H1:2024-25 reflecting the impact of model code of conduct for general elections and is expected to pick up pace in H2:2024-25.

Overall, it said, the Centre has achieved more than half of its budgeted revenue in H1:2024-25 while containing its expenditure to less than half of what it had projected for the entire financial year.

This augurs well for the Centre to meet its gross fiscal deficit target of 4.9 per cent of GDP for 2024-25.

Social sector expenditure by Indian states has increased significantly from 5.4 per cent of GDP in 2005-06 to 8.1 per cent in 2024-25 (BE), with growing prioritisation of education, health, and other critical social services.

However, the effectiveness of this spending depends on how well it translates into tangible outcomes.