State Freebies Will Reduce Funds For Social, Infra Development: RBI Staff Report

Economists from the Reserve Bank of India have warned that freebies announced by state governments in recent months could eat into the money needed to take key infrastructure, both social and economic, further forward. “Several States have announced sops in their 2024-25 Budgets including free electricity to agriculture and households, free transport, allowances to unemployed youth and monetary assistance to women. Such spending may divert resources away from critical social and economic infrastructure development,” central bank staff said in an article reviewing government finances for the first half of the current financial year. The paper, written by RBI staff from its Department of Economic and Policy Research, does not represent the views of the central bank. The warning from RBI economists comes close on the heels of comments the central bank made in its study of state budgets, published last week, where it said that a sharp rise in subsidy spending is an “area of incipient stress” and that “states need to contain and rationalise their subsidy outgoes, so that such spending does not crowd out more productive expenditure.”