States are increasingly borrowing to finance subsidies. This reduces fiscal space for capital and other developmental expenditure, compromising long-term growth.
While subsidies can be effective tools for poverty alleviation and reducing inequality, their fiscal sustainability has become increasingly questionable, particularly in the challenging post-pandemic economic environment.
In a recent study (Amarnath et al. 2024), I along with my co-authors, analyse budgetary data from seven Indian states – Punjab, Rajasthan, Uttar Pradesh, Odisha, Andhra Pradesh, West Bengal and Nagaland – for the period between 2018-19 and 2022-23 https://theprint.in/opinion/state-subsidy-burden-india-fiscal-health/2551909/
Overview of findings
Overall, we see that revenue deficits have become persistent, and fiscal space has shrunk dramatically. States with revenue deficits are spending over 20 per cent of their revenue expenditure on subsidies, while their fiscal space has shrunk to less than 50 per cent of revenue receipts. Committed expenditures – including salaries, pensions, and interest payments – now consume over 80 per cent of revenue receipts in states like Punjab (81.5 per cent) and Kerala (71.8 per cent). This leaves limited room for developmental spending, a concern highlighted by recent analysis by the Reserve Bank of India (RBI, 2022).