Why in Broadcast?

• The Reserve Bank of India recently published a report named, the state finances: A study of Budgets of 2022-23. This report analyses, assesses and provides information about the finances of the state governments including the challenges. The theme of this year’s Report is “Capital Formation in India – The Role of States”.

Key points mentioned in the report

• As per the RBI report, the gross fiscal deficit (GFD) is going to reduce to 3.4 percent of GDP from 4.1 percent 2020-21 aided by broad based economic recovery and high revenue collection.
• The state debts are supposedly going to ease down to 29.5 percent of GDP against 31.1 percent in the year 2020-21.
• Although, the number is still higher than 20 percent which was recommended by the FBRM review committee 2018.
• The outstanding liabilities of states have moderated from their pandemic time peaks, debt consolidation at the individual state level warrants urgent attention.
• The non-state revenues, that are received through fines, royalties and other charges, are expected to increase driven by industry and general services.
• Further the report stated that States will expect increase in their revenue through sources like state GST, excise duties and sales tax etc.

About GFD

• GFD is a measurement of the state government’s overall financial health and is derived by deducting total revenue from total expenditure.
• A decline in GFD is typically seen favourably since it shows that the state government is better able to manage its revenue and expenditure.

Recommendations made by the report

• The state governments need to focus more on debt consolidation. A glide path also needs to be set, keeping in view the need for rebuilding fiscal space to deal with future shocks.
• To promote economic growth and development, and expanding productive capacities the state must increase allocations for sectors like health, education, infrastructure and green energy transition etc.
• Further, a capex buffer fund needs to be created during good times when revenue flows are strong to smoothen and maintain expenditure quality and flows through the economic cycle.
• The states need to encourage and facilitate higher inter-state trade and businesses to realise the full benefit of spill-over effects of state capex across the country.

Way Forward

• The fiscal health of states have rebounded from the pre-pandemic levels, with increased revenue collections and efficient budget management.
• However, with the growing recognition for responsible and effective climate change policies at state levels, the centre must ensure that the states are well equipped to realise their full potential towards the committed national target of net-zero emissions 2070.
• Also, the states need to set state finance commissions in a regular and timely manner for determining the assignment of taxes revenues etc. to local governments for greater public good.