Mumbai: State governments need to formulate better mechanisms to estimate their cash flows so that they need to borrow from the market only when required, the Reserve Bank of India (RBI) said in a study on Wednesday.
Often states are blamed of borrowing from the market despite running surplus balances, pressuring a government bond market that is already saddled with the central government’s record high market borrowing programme.
“States need to put in place an effective forecasting and monitoring mechanism for their cash inflows and outflows so that a need-based approach to market borrowings is adopted,” the RBI said in its study on state finances for 2010-11.
The central bank also lauded states for being able to bring down their debt to output ratio despite additional spending.
“In 2010-11, the aggregate outstanding debt-GDP ratio of states is likely to decline further to 23.1%, reflecting higher growth in GSDP (Gross State Domestic Product) than that in outstanding debt,” the RBI said.
In 2009-10, the ratio was 25%, below 30.8% recommended by the Twelfth Finance Commission.
“With an improvement in the consolidated revenue account of States, the gross fiscal deficit as a ratio to GDP is estimated to decline to 2.5% in 2010-11 from 3.3% in 2009-10.”
However, the central bank expressed concerns on the quality of fiscal consolidation by states.
“The emerging pattern of expenditure shows that as a ratio to GSDP, development expenditure, capital outlay and social sector expenditure are budgetted to be lower in many states, raising concerns about the quality of fiscal adjustment being undertaken at the state level.”