Home / Economy / State fiscal health makes smart recovery in FY23 after sharp pandemic-induced deterioration: RBI

NEW DELHI : The fiscal health of the states has improved from a sharp pandemic-induced deterioration in 2020-21 on the back of a broad-based economic recovery, the Reserve Bank of India (RBI) said on Monday. 

In its report titled “State Finances: A Study of Budgets of 2022-23", the apex bank said that improved fiscal health also stepped up revenue collections and the States’ gross fiscal deficit (GFD) is now budgeted to decline from 4.1 per cent of gross domestic product (GDP) in 2020-21 to 3.4 per cent in 2022-23 within the indicative target of 4% set by the centre. 

While States’ debt is budgeted to ease to 29.5 per cent of GDP in 2022-23 as against 31.1 per cent in 2020-21, it is still higher than 20 per cent recommended by FRBM Review Committee, 2018, under the Chairmanship of N. K. Singh, warranting prioritisation of debt consolidation, the RBI said in its annual report that provides information, analysis and an assessment of the finances of State governments for 2022-23 against the backdrop of actual and revised/provisional accounts for 2020-21 and 2021-22, respectively. 

Another positive from consolidation of finances is increased productive capital expenditure by states. In 2022-23, States have budgeted higher capital outlay than in 2019-20, 2020-21 and 2021-22. The theme of this year’s Report is also “Capital Formation in India - The Role of States".

Going forward, increased allocations for sectors like health, education, infrastructure and green energy transition can help expand productive capacities if States mainstream capital planning rather than treating them as residuals and first stops for cutbacks in order to meet budgetary targets, the report said. 

The RBI report has also pointed at the need for states to create a capex buffer fund during good times when revenue flows are strong so as to smoothen and maintain expenditure quality and flows through the economic cycle.

It has also said that to crowd in private investment, the State governments may continue to focus on creating a congenial ecosystem for the private sector to thrive. States also need to encourage and facilitate higher inter-state trade and businesses to realise the full benefit of spillover effects of State capex across the country, the report said.

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