The Reserve Bank of India stresses that states must borrow less, spend better, and strengthen the base of long-term growth.

What happens when states spend more on free power and cash handouts than on roads or hospitals? This is the puzzle RBI Governor Sanjay Malhotra placed before state finance secretaries at the 35th Conference of State Finance Secretaries held in September 2025 in New Delhi.

He said fiscal discipline is not a side note in governance but the main pillar that supports economic growth. The Governor added that India’s progress depends on how states choose to spend and how carefully they handle their debts.

Fiscal Discipline And Economic Growth In India

The RBI’s State Finances Report 2024 released in December 2024 explained the debt position of states. Outstanding liabilities of states stood at 28.5 percent of GDP by March 2024. This was a fall from 31 percent in March 2021. Yet it was still higher than the 25.3 percent recorded in March 2019, just before the pandemic.

This path shows improvement but also points to the risk that states may slip again if borrowing is left unchecked. Growth and fiscal discipline in India must run together because debt without control can harm development.

States’ Outstanding Liabilities (% of GDP)

Year	Liabilities
March 2019	25.30%
March 2021	31.00%
March 2024	28.50%

These numbers underline the need for a glide path that keeps debt sustainable. The Governor’s note was not only about numbers but also about making discipline the centre of planning.

RBI Governor On States Quality Spending

A sharp focus was placed on how money is used. States were told to increase capital outlay rather than adding more subsidies. According to the Union Budget 2024-25 and the Economic Survey 2024, capital outlay of states improved to 2.6 percent of GDP in 2023-24, up from 2.2 percent in 2022-23. Many states have budgeted around 3 percent of GDP for 2024-25.

This growth in capital expenditure shows states are slowly shifting towards long-term investment. Better roads, power plants, schools and hospitals create growth over decades, unlike short-term subsidies.

States’ Capital Outlay (% of GDP)

Year	Capital Outlay
2022-23	2.20%
2023-24	2.60%
2024-25 (Budgeted)	3.00%

The RBI guidance on prioritising quality expenditure stands on this base. The central bank has argued that such investments help raise productivity, which is the real driver of economic growth.

Importance Of Fiscal Discipline For Development

The Governor raised concern about the rising subsidy burden. Farm loan waivers, free or subsidised electricity, gas cylinders and bus rides are consuming a large share of budgets. The RBI said these schemes are crowding out more productive spending. It is not about denying support but about making sure subsidies do not harm investment.

A comparison of subsidy spending and capital outlay reveals the gap. Subsidies have consistently taken more share of GDP than capital investments.

Subsidies vs Capital Expenditure (% of GDP)

Year	Subsidies	Capital Expenditure
2021-22	3.50%	2.10%
2022-23	3.20%	2.20%
2023-24	3.00%	2.60%

This trend shows why the RBI stresses on fiscal discipline for development. States must not allow short-term political measures to eat into future growth potential.

Indian States Fiscal Management Strategies

The gross fiscal deficit of states has shown some control. In 2022-23, the combined gross fiscal deficit was 3.1 percent of GDP. It fell to 2.91 percent in 2023-24, within the Fiscal Responsibility and Budget Management (FRBM) Act limit of 3 percent. Yet states have budgeted a rise to 3.2 percent in 2024-25, slightly above the limit.

This creates a challenge. If states push deficits beyond the ceiling, interest costs can rise and borrowing space can shrink. Past reactions from the Union Government included stricter borrowing limits and directions to keep within FRBM targets.

Gross Fiscal Deficit Of States (% of GDP)

Year	Gross Fiscal Deficit
2022-23	3.10%
2023-24	2.91%
2024-25 (Budgeted)	3.20%

These figures explain why the Governor pressed for better fiscal management strategies at the state level. Without stronger control, the cycle of high borrowing and high interest costs may return.

Theory Behind Fiscal Discipline

Fiscal discipline means keeping government finances sustainable. In practice, it means two things. First, the debt of the state should not grow faster than its income. Second, the state should spend more on building assets than on giving short-term relief. When interest costs rise, they eat into funds for health, education and infrastructure. This weakens the base of growth.

The Governor reminded finance officials that subsidies create pressure but capital expenditure creates income. The theory is simple but its application requires discipline.

How This News Connects With Past Coverage

The RBI has raised this issue before. In December 2024, the central bank’s State Finances Report asked states to set a glide path for fiscal consolidation. At that time, Reuters reported that subsidies were rising and liabilities had reached 28.5 percent of GDP. This warning was covered earlier in Business Standard.

A LoansJagat blog, “10 Best Passive Income Ideas for 2025 to Grow Your Wealth”, also underlines how growing liabilities, higher inflation and subsidy burdens erode savings and reduce fiscal flexibility, pointing out that individuals are already looking for stable income sources as much of the policy uncertainty piles on.

The present conference builds on that message but adds sharper numbers on capital outlay and deficit targets. Linking the past with today shows the RBI has been consistent, but the urgency has grown.

Past Reactions By Government And Banks

The Union Government has often reacted by pushing states to respect FRBM limits. During 2020, extra borrowing was allowed only to help with pandemic recovery. After that, the Centre tightened limits once again. Banks have also raised concerns. When states borrow heavily, interest costs on state development loans rise. This affects not only state budgets but also the bond market.

In contrast, years when states managed discipline saw lower borrowing costs. This history explains why both the government and banks are aligned with the RBI’s call in 2025.

Conclusion

The RBI Governor’s statement at the September 2025 finance secretaries’ meet has brought state finances under the scanner again.

The numbers in the State Finances Report 2024, the Economic Survey 2024 and budget documents show the same message. Debt is still high, subsidies remain heavy, and deficits need attention. At the same time, capital outlay is improving, which is a positive sign.

The call is simple. Indian states must design fiscal management strategies that cut waste, raise productive investments and keep borrowing under control. Fiscal discipline and economic growth in India are tied together, and quality spending is the link between them.

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