NEW DELHI: The Reserve Bank of India has urged the Finance Commission to consider recommending “an increased share of conditional transfers” to the state governments, based on reforms, quality of expenditure and fiscal sustainability. This, it said, would help harness healthy competition across the states, and strengthen the fiscal consolidation drive.
The RBI‘s comments comes shortly after the Cabinet approval for the terms and reference of the 16th Finance Commission (FY27-31).
In its “State Finances: A Study of Budgets of 2023-24” released on Monday, the RBI revealed that the states continued with fiscal consolidation in FY23 with their combined fiscal deficit contained at 2.8% of Gross Domestic Product (GDP) for the second year in a row. As a result, the debt-GSDP ratio came down from 29.3% in FY22 to 27.5% in FY23, the report said, citing the revised estimates (RE).
The overall fiscal outlook for states remained favourable in 2023-24 too, the RBI, which is also the manager of the country’s public debt, said, adding that states have adequate fiscal space for undertaking higher capex. At the individual level, however, the debt-GDP ratio and fiscal deficit for some states remained high.
This is for the second year in a row that the states’ combined fiscal deficit is contained below the respective budget estimate (BE), and this consolidation was primarily through a reduction in the revenue deficit.
“… financial incentives to those States that initiate measures to boost tax revenue collections may be considered. For sustained fiscal consolidation, the FC- XVI could examine reinstating some of the fiscal efficiency parameters,” the RBI said.
With revenue deficit grants to revenue deficit states seen as a disincentive for states undertaking sound fiscal management, the RBI report said there is a need for a review of such grants. The 16th FC, which will be constituted shortly, will give its award on central tax devolution and grants for five years beginning FY27.
The report also called for grants linked to climate action by states.
So far, buoyancy in revenues has supported consolidation and sustained a large increase in capital spending. Over the medium term, however, states need to address several challenges to fiscal sustainability, the RBI said in the report.
The return to the Old Pension Scheme (OPS) by a few states and reports of some other states moving in the same direction would exert a huge burden on state finances and restrict their capacity to undertake growth-enhancing capital expenditures, it warned. Internal estimates suggest that if all the State governments revert to OPS from the National Pension System (NPS), the cumulative fiscal burden could be as high as 4.5 times that of NPS, with the additional burden reaching 0.9% of GDP annually by 2060. “Thus, any reversion to OPS by the States will be a major step backwards, undermining the benefits of past reforms and compromising the interest of future generations,” it added.
Some states’ fiscal deficits exceeded 4% of GSDP as against the prudential level of 3% of GSDP. They also have debt levels double or more of the prudential level of 20% of GSDP. Punjab, which has rolled out OPS and spends a lot on subsidies, saw its debt-GSDP remain at the highest among all major states at 47% in FY23 and is estimated to be 47.6% in FY24. Punjab’s fiscal deficit was also estimated at 4.9% of GSDP in FY23 and is projected to be 4.7% in FY24. The debt-GSDP of West Bengal, Bihar and Kerala are estimated in the range of 36-40% in FY23-F24. Bihar’s fiscal deficit was estimated to be the highest in FY23 at 9.2%.
Among the major states, Odisha has the best debt-GSDP at 16.85% in FY23, followed by Maharashtra at 18.5% and Gujarat at 18.6%. These states’ fiscal deficit was well below the prudential level of 3%.
Source: The Financial Express
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