The fiscal health of States has improved from a sharp pandemic-induced deterioration in 2020-21 on the back of a broad-based economic recovery and high revenue collections with their gross fiscal deficit (GFD) budgeted to decline from 4.1% of gross domestic product (GDP) in 2020-21 to 3.4% in 2022-23, according to a RBI study on State finances.
While States’ debt is budgeted to ease to 29.5 % of GDP in 2022-23 as against 31.1% in 2020-21, it is still higher than the 20% recommended by the N.K. Singh Committee for reviewing FRBM Act in 2018,, warranting prioritisation of debt consolidation, the RBI said.
In 2022-23, States have budgeted higher capital outlay than in 2019-20, 2020-21 and 2021-22.
Going forward, increased allocations for sectors such as health, education, infrastructure and green energy transition can help expand productive capacities if States mainstream capital planning rather than treating them as residuals and first stops for cutbacks in order to meet budgetary targets.
“It is worthwhile to consider creating a capex buffer fund during good times when revenue flows are strong so as to smoothen and maintain expenditure quality and flows through the economic cycle,” the RBI said.
“To crowd in private investment, the State governments may continue to focus on creating a congenial ecosystem for the private sector to thrive. States also need to encourage and facilitate higher inter-state trade and businesses to realise the full benefit of spillover effects of State capex across the country,” it added.
