RBI tells states, Get Fiscally fit to sustain growth

13th July 2018: Reserve Bank of India report said states need improvement to increase 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 degeneration in their finances. 
 
“ In several states, On the expenditure side Apparent commercial demands are appearing, particularly on account of pay reviews, interest payments and other state-specific schemes like farm-loan waivers,’’ the central bank said in its annual report on state finances. “ During 2015-16 and 2016-17 States fiscal position depreciated due to the states taking over of Discom debt under UDAY schemes. Consequently, their consolidated financial debt raised above the FRBM threshold level.’’ 
Financial positions of states are becoming a point of concern for pecuniary policy committee as they remain to splurge on doles even though the central government has been generating financial prudence. 
 
Since most of the states have to acquire from the market and they are also tied to the Fiscal Responsibility Budget Management Act, slippages display in market rates. 
“ From its fiscal consolidation path debt reservations can deflect the state, coming as they do, on top of UDAY and the implementation of the pay commission recommendations.’’ 
The yield differential between state and central government bonds is revealing symbols of broadening, symbolizing lesser demand for these securities due to deteriorating finances. The gap of yield between benchmark central government bond has risen to 55 to 58 basis points and the state bonds which used to be about 40 to 45 basis points for top states. A basis point is 0.01 percentage point. While the states budgeted a gross fiscal deficit to entire household product ratio of 2.7%in 2017-18, the revised estimates place it at 3.1%, significantly due to shortfalls in own tax revenues and higher revenue expenditure. “Given debt sustainability concerns associated with expanding market borrowings, increased efficiency of expenditures and fiscal marksmanship may be necessary to support growth while maintaining fiscal prudence for 2018-19’’ it said. 
 
But there’s a silver lining for the states in the form of likely higher revenue collections. 
“The GST implementation could cover the way for creating larger profits for higher efficiency and broadened tax base,’’ the report said. “But the present lack of incentives to undertake fiscal reform so as to earn under measures could  provide state finances weak to debt sustainability concerns.’’