Indian states’ finances improve, gross fiscal deficit set to fall in 2022/23: RBI

MUMBAI: The finances of Indian states are expected to improve in 2022-23 with the consolidated gross fiscal deficit to gross domestic product ratio seen falling to 3.4% from 4.1% for the previous year, the Reserve Bank of India said on Monday.

“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 and resulting high revenue collections,” the central bank said in the State Finances Report that is released annually.

Rising expenditure and limited growth in revenue during the pandemic years had put pressure on states’ finances.

While States’ debt is budgeted to ease to 29.5% of GDP in 2022-23 from 31.1% in 2020-21, it is still higher than the 20% recommended by the Fiscal Responsibility and Budget Management Review Committee in 2018, warranting prioritisation of debt consolidation, the RBI said.

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The central bank also recommended that states create a fund for longer-term spending when revenue collection is strong.

“It is worthwhile considering creating a capex buffer fund during good times…to smoothen and maintain expenditure quality and flows through the economic cycle,” the central bank added.

In the current financial year, states are increasing current expenditure, such as that on salaries, interest payments and subsidies, at a quicker pace than spending on longer-term infrastructure projects.

States’ capital expenditure has grown just 0.9% in the April-October period from the year earlier period, the report said, contrary to a sharp rise in such spending by the federal government and which has a bearing on economic growth.

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“This low capital outlay partly reflects the tendency to back-load expenditure in the latter half of the year,” the RBI said, adding that states may not meet capital expenditure goals for the full financial year but are still expected to have accelerated such spending in the second half.