Need for greater focus on state finances: RBI

As part of fiscal transparency initiatives, Reserve Bank of India has called for greater attention on structural issues confronting state finances in the country.

“There is also need for greater focus on structural issues confronting state finances, particularly for those states that could not undertake rule-based fiscal corrections prior to the crisis years of 2008-09 and 2009-10,” a RBI study released today said.

The state governments, it said, need to ensure that their finances capture both explicit and implicit liabilities associated with certain off-budget activities, including project financing undertaken through special purpose vehicle (SPV) or public-private partnership (PPP) mode.

The study also highlighted several issues of significance and concern for the state governments.

“Although all the states except Goa have amended their fiscal responsibility and budget management (FRBM) Acts or Rules, most of them do not include provisions for additional disclosures for enabling transparent assessment of state finances.

According to the regulator, the recommended restructuring of the public expenditure system would enable better management of outlays for effective outcomes.

“Successful restructuring of the public expenditure management system would, however, call for appropriate assimilation of the new system across the government machineries at all levels including the Planning Commission, the Central and the state governments,” it said. Concerned with financial losses of state power utilities, the regulator also emphasised on the issues on debt liabilities of distribution utilities and the revision of power tariffs of the states.

“The losses of state power utilities... necessitate not only renegotiating debt liabilities of distribution utilities but also undertaking reforms to enable independent functioning of state electricity regulatory commissions and to address issues on periodic tariff revisions,” it added.

Besides the state finances, the study also referred to issues regarding fiscal consolidation, decline in key expenditure ratios that raises concern on the quality of fiscal adjustment and states’ overall debt-GDP ratio.

“The consolidated revenue account is budgeted to switch from deficit to surplus during 2011-12 after a gap of two years, driven primarily by a compression in revenue expenditure,” it said.

The improvement in the revenue account is expected to not only provide the necessary resources for increased capital outlay but also enable a reduction in the Gross Fiscal Deficit and Gross Domestic Product ratio (GFD-GDP ratio) by 0.5 percentage point in 2011-12 over 2010-11.