The central bank has suggested that states consider creating a capital expenditure buffer fund in good times and not treat capex as residual and the first stop for cutbacks.
“While the outstanding liabilities of states have moderated from their pandemic time peaks, debt consolidation at the individual state level warrants urgent attention and a glide path needs to be set, keeping in view the need for rebuilding fiscal space to deal with future shocks,” RBI said in its report on state finances.
While the total debt of states is expected to ease to 29.5% of the gross domestic product (GDP) in FY23 from 31.1% in FY21, it is still higher than the 20% recommended by the Fiscal Responsibility and Budget Management (FRBM) Review Committee headed by NK Singh in 2018, which emphasised priority on debt consolidation.
The fiscal health of the states improved from the sharp Covid-induced deterioration in FY21 on the back of a broad-based economic recovery, which led to higher tax revenues. The gross fiscal deficit of the states is budgeted to decline to 3.4% in FY23 from 4.1% of GDP in FY21. Although this is higher than the FRBM target of 3%, it remained within the target of 4% set by the Centre.
The first two waves of the pandemic posed a major fiscal management challenge for states following revenue shortfalls and the compelling need for higher spending, but subsequent waves had a relatively milder impact on their finances.
In line with the favourable fiscal outlook for states, capital expenditure is also expected to gain momentum in the second half.
The central bank suggested that states focus on creating a congenial ecosystem to encourage private investment, facilitate higher inter-state trade, and enable businesses to realise the full benefit of spillover effects of state-led capex across the country.
The RBI also favours higher allocations for sectors like health, education, infrastructure and green energy as these can help expand productive capacities.
