States to boost fiscal health in FY24 with high revenue, capex: RBI report

States are expected to improve their fiscal health with revenue deficits falling and capital expenditure increasing in 2023-24, shows the RBI’s latest State Finances Report.
 

The proportion of states’ revenue in gross state domestic prod­uct (GSDP) is projected to reach 8.2 per cent in FY24, the highest sin­ce 2018-19 (chart 1).

Their capacity to generate tax revenue is expected to increase to nearly half of their revenue receipts in FY24, mainly due to better state goods and services tax (GST) collections. Central tran­sfers, which have declined consistently in the last six years, are likely to be at their lowest ratio of 42.5 per cent (chart 2).

 

Revenue expenditures, which form over 80 per cent of total spending, are expected to stay elevated. Committed expenditures, which declined in 2022-23, are projected to remain at 4.5 per cent (as a percentage of GSDP) in FY24, too.
 

Although interest payments and liabilities account for less than a fifth (18 per cent) of the total expenditure, the report says the return to the old pension scheme in a few states could put a “huge burden” on their finances and limit their “capacity to undertake growth-enhancing capital expenditures” (chart 3).

 

Overall, the internal debt (as a proportion of GSDP) is expected to remain high at 27.6 per cent – exceeding 35 per cent for some states. For such states, an increase in subsidies and non-merit goods and services will “render their fiscal situation precarious,” the report says.
 

While the states’ combined subsidy bill is expected to exceed Rs 4 trillion in FY24, the ratio of subsidies to the states’ own tax revenue is expected to decline to 19.8 per cent in FY24 over FY23 Revised Estimates, assuming tax collections rise by 18 per cent. This, however, remains higher than the pre-pandemic ratio of 17.4 per cent (chart 4).

 

Social sector expenditure is also expected to shoot up to over 45 per cent of the state expenditure (chart 5).

It is likely to be higher for states such as Manipur, Bihar and Odisha, where per capita incomes are lower than the average for India (chart 6).