State's fiscal health on improved state: RBI

Mumbai: The Reserve Bank of India (RBI) said on Monday that the fiscal health of states has recovered following a severe decline brought on by the pandemic in FY21.

In its report State Finances: A Study of Budgets of 2022–23, the RBI noted that increased revenue collections were also aided by improved fiscal health, and that the states' gross fiscal deficit is now budgeted to decrease from 4.1% of GDP in FY21 to 3.4% in FY23, falling within the indicative target of 4% set by the federal government.

The RBI stated in its annual report that provides information, analysis, and an assessment of the finances of state governments for FY23 against the backdrop of actual and revised/provisional accounts for FY21 and FY22, respectively, that while states' debt is budgeted to ease to 29.5% of GDP in FY23 as opposed to 31.1% in FY21, it is still higher than the 20% recommended by the FRBM Review Committee, 2018, chaired by N.K. Singh, necessitating the prioritisation.

An additional benefit of financial consolidation is an increase in governmental capital spending on productive infrastructure. States projected a greater capital expenditure for FY23 than for FY20, FY21, or FY22. This year's study has the same theme: Capital Formation in India: The Role of States.

Increased funding for areas like infrastructure, green energy transition, health, and education may assist enhance productive capacity in the future if states mainstream capital planning as opposed to seeing these areas as residuals and first targets for budgetary reductions, the research suggested.

In order to balance and sustain spending quality and flows across the economic cycle, the RBI study also emphasised the necessity for governments to establish a capital expenditure buffer fund during prosperous periods of high income flows.

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