RBI's 'Report on State Finances'

Why in news?

The Reserve Bank of India recently brought out the ‘Report on State Finances’.

What are the highlights?

• RBI has warned that many States may face fiscal risks this year.
• States budgeted a gross fiscal deficit (GFD) to gross domestic product (GDP) ratio of 2.7% in 2017-18.
• The GFD-GDP ratio crossed the threshold for the third consecutive year.
• For 2018-19, the states have budgeted for a consolidated GFD of 2.6% of GDP.

• Outstanding liabilities of States grew at double digits for all years barring 2014-15.

• Maharashtra, Uttar Pradesh, TN and WB had the largest shares of market borrowings in 2017-18.
• Among the Special Category States (SCSs), Assam, Himachal Pradesh, J&K and Uttarakhand were the major borrowers.
• The growth of gross market borrowings of SCSs during 2017-18 outstripped that of non-special category States by a wide margin of 7%.

What are the causes?

• Fiscal deficit of states is essentially due to shortfalls in own tax revenues and higher revenue expenditure.
• State budgets have been under pressure due to:

1. committed expenditures on account of pay commission awards
2. interest payments
3. expenditures from State-specific schemes like farm-loan waivers
4. issuance of UDAY (Ujwal Discom Assurance Yojana) bonds in 2015-16 and 2016-17

• In the aftermath of the 2008 global financial crisis, States borrowed big from markets.
• It was mainly due to the additional fiscal space given to states as part of stimulus measures.
• The 10-year bonds had now reached maturity.
• This has increased the redemption pressures on the States that issued them.
• This would imply that the borrowings of States are expected to rise.
• Also, a substantial portion of the outstanding State Development Loans (SDLs) will mature in the next 3 years.
• This would keep the redemption pressure high in the near future.

What are the suggestions?

• The resultant slippage in fiscal deficit target could probably reflect in higher borrowing requirements for 2018-19.
• This, in turn, could be an impact on borrowing costs.

• RBI has thus suggested reducing leakages and enhancing efficiency of the public distribution system.
• This would rationalise the expenditure of the states.
• Also, improved public financial management practices may be necessary to rebuild the fiscal space.
• It is essential to undertake fiscal reforms, so as to lower borrowings.
• Otherwise, borrowings could add to the concerns on debt sustainability.
• There is also a need for larger and faster corrections in primary deficits.
• These are essential to adhere to the revised Fiscal Responsibility and Budget Management (FRBM) target.
• It stipulates a target of 20% for the State-level debt to GDP ratios by 2024-25.

Source: BusinessLine, Economic Times