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:

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