Get Fiscally fit to sustain growth, RBI tells states

MUMBAI: States have to improve the efficiency of their expenses and improve their budgeting for a sustainable growth with fiscal prudence as the last two fiscal years witnessed a sharp deterioration in their finances, a Reserve Bank of India report said.

“Visible fiscal pressures are emerging for several states on the expenditure side, particularly on account of pay revisions, interest payments and other state-specific schemes like farm-loan waivers,’’ the central bank said in its annual report on state finances. “States’ fiscal position deteriorated during 2015-16 and 2016-17 due to the states taking over of Discom debt under UDAY schemes. Consequently, their consolidated fiscal deficit rose above the FRBM threshold level.’’

Fiscal positions of states is becoming a point of worry for monetary policy committee as they continue to splurge on doles even though the central government has been propagating fiscal prudence.


Since most of the states have to borrow from market and they are also tied to the Fiscal Responsibility Budget Management Act, slippages reflect in market rates.

While the states budgeted a gross fiscal deficit to gross domestic product ratio of 2.7%in 2017-18, the revised estimates place it at 3.1%, essentially due to shortfalls in own tax revenues and higher revenue expenditure. For 2018-19, states have budgeted for a consolidated GFD of 2.6% of GDP with the correction mainly emanating from a revenue surplus of 0.2% of GDP “Given debt sustainability concerns associated with rising market borrowings, improved efficiency of expenditures and fiscal marksmanship may be necessary to sustain growth while maintaining fiscal prudence,’’ it said.

“Debt waivers can deflect the state from its fiscal consolidation path, coming as they do, on top of UDAY and the implementation of the pay commission recommendations.’’

The yield differential between state and central government securities is showing signs of widening, indicating lesser demand for these securities due to deteriorating finances. The yield gap between benchmark central government bond and the state bonds which used to be about 40 to 45 basis points for top states, has risen to 55 to 58 basis points. A basis point is 0.01 percentage point.

But there’s a sliver lining for the states in the form of likely higher revenue collections.

“The GST implementation could pave the way for generating higher revenues through greater efficiency and broadened tax base,’’ the report said. “But the present lack of incentives to undertake fiscal reform so as to earn lower spreads could render state finances vulnerable to debt sustainability concerns.’’