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RBI for CSS implementation to improve state fiscal deficits
April, 08th 2016

The Reserve Bank of India (RBI) on Thursday indicated a need for an effective implementation of centrally sponsored schemes (CSS), strengthening of state finance commissions (SFC), reformation of state level public enterprises (SLPE) and improvement in the viability of discoms in order to improve the fiscal positions of states.

The central bank has come out with a report titled ‘State Finances: A Study of Budgets 2015-16? according to which the gross fiscal deficit of states for 2015-16 has improved to 2.4% of the GDP. The revised estimate for FY2015 stood at 2.9%.

The overall fiscal performance of states is expected to improve with the revenue account turning back to surplus thus enabling a reduction in GFD-GDP ratio during 2015-16, RBI said. “Such improvement, if sustained, would reduce the debt burden of states and facilitate their progress on the path of fiscal consolidation,” the report stated.

The RBI has also called for an effective implementation of CSS which, it said, needs to be improved through a multi-faceted approach relying on professionalism of public service delivery, quality management and innovative use of IT.

Following the recommendations of the 14th Finance Commission, central assistance to states has been subsumed in major CSS in view of the larger devolution of the divisible pool of tax revenue to states.

“Although higher devolution will lead to an increased share in central taxes by 0.5% of GDP in 2015-16, the net impact of the changed pattern of funding is a decline of 0.3% in central transfer to states from the previous year, with adverse implication for states’ spending on social infrastructure,” the report said.

The central bank has also asserted on the need to strengthen SFCs while also adding that most of them suffer from lack of transparency. In order to synchronize the formation of SFCs with the Central Finance Commission (CFC), there is a need to appoint the SFC at the expiration of every fifth year, it said.

Implementation of GST is another aspect that has been highlighted in the report which said it will make the industry more competitive through dismantling of the complex indirect tax structure and would boost the tax revenue of states as lasting solution.

As far as the Ujwal Discom Assurance Yojana (UDAY) scheme is concerned, the RBI report said state finances may come under stress in the coming years on account of burgeoning liabilities due to takeover of 75% of the existing debt of discoms.

RBI said that this would considerably reduce the fiscal space of states which might lead to curtailment of capital expenditure with an adverse impact on growth.

The central bank has pointed out that the quality of expenditure of most states has modestly improved following the enactment of fiscal responsibility and budget management (FRBM).

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