Mumbai: The Reserve Bank called for higher capital outlays, consistent fiscal consolidation and limiting the debt-GDP ratio to improve the finances of the states, whose combined gross fiscal deficit has improved by 20 bps to 2.3 per cent of GDP in FY 2014-15.
"Creating fiscal space for higher capital outlays, improving the quality of fiscal consolidation and containing the debt-GDP ratio of the states are crucial to improving their finances," RBI said in its report on 'State finances: A study of budgets of 2014-15' released here this late evening.
The report said based on the latest budget documents of 17 states, which account for 88 per cent of both the non-debt receipts and total expenditure in 2014-15 (budget estimates), the revised estimates for 2014-15 indicate deterioration in the deficit indicators as compared to the budget estimates.
While the combined gross fiscal deficit of the states improved to 2.3 per cent in FY 2014-15 from 2.5 per cent in the previous year, their gross revenue surplus improved in FY15 to 0.4 per cent from zero per cent of GDP in the previous fiscal.
However, if we compare the fiscal deficit in FY 2011-12 when it stood at 1.9 per cent of the combined GDP of the states and 2 per cent in FY2012-13 and 2.2 per cent in FY2013-14, the revenue surplus stood at 0.3 per cent, 0.2 per cent, 0.4 per cent and 0.0 per cent of GDP, respectively.
In absolute terms, the report said, the gross fiscal deficit of states stood at Rs 2,95,060 crore or 2.3 per cent in 2014-15 (BE) as against Rs 2,45,050 crore or 2.2 per cent in 2013-14 (BE), while the combined revenue surplus stood at Rs 54,170 crore or 0.4 per cent of their GDP as against a surplus of Rs 47,730 crore or 0.4 per cent, on the overall improvement in revenue collection.
The post-crisis fiscal consolidation experience of the states indicates erosion of revenue surpluses particularly in 2013-14 (revised estimates), the report noted.
Although the fiscal deficit at the consolidated level remained within the target set by 13th Finance Commission during the period under review, state level targets were not met by some states, it said.
The RBI report on the state finances further said at the consolidated level, state finances budgeted for some improvement during 2014-15, although information available for 17 states warrants a careful assessment of initial expectations.
"Budget estimates for 2014-15 had hinged around a marked acceleration in revenue receipts to bring about an expansion in the surplus on the revenue account after erosion to near-balance in the preceding year," the report said.
Six out of the total of 29 states (including bifurcated Andhra) budgeted for revenue deficits and 10 projected gross fiscal deficits higher than 3 per cent of gross state domestic product.
It said with the introduction of the consumption-based destination-centric goods and services tax, attention will need to be paid to the development of a uniform model for taxing e-commerce to reduce complexity and improve compliance.
"States' revenue efforts would be complemented by the award of the 14th Finance Commission which seeks to expand autonomy of states within the ambit of fiscal federalism by stepping up statutory transfers through untied tax devolution, reduction of discretionary plan grants and improvements in the design of transfers," the report said.
It said efforts need to be redoubled to sustain the pick-up in capital outlays that occurred in 2013-14 (RE) so as to ensure high quality fiscal consolidation.
"However, financing growth in capital outlays through grants from the centre in the face of virtually stagnating own revenues and tax devolutions as in 2013-14 would not be a viable proposition going forward," it said.
Setting the consolidated debt-GDP ratio of states on a declining trajectory is crucial to improving their finances, the report said.
It said halting the deterioration in the gross fiscal deficit-gross state GDP ratio that took place in 2013-14 is also critical in the context of fiscal consolidation.
The states have, in general, performed poorly in terms of fiscal marksmanship, reflecting over-estimation of expenditures relative to receipts.
"The states need to improve the reliability of their forecasts of key fiscal parameters like tax and expenditure, and macroeconomic aggregates," the report said.