States may cause fiscal slippage because of populist schemes, warns RBI

Loan waivers, income support schemes are 'poor fiscal marksmanship', says RBI in meeting with Finance Commission.

States are following "poor fiscal marksmanship" with farm loan waivers, income support schemes and bonds for power distribution companies, said the Reserve Bank of India (RBI) on Wednesday.

Many states and the Central government, in the run up to Lok Sabha elections, have announced sops to marginalised sections, including the farmers and the poor.

The RBI cautioned against such policies in a meeting between its governor, Shaktikanta Das, and deputy governors and members of the 15th Finance Commission in Mumbai.

The RBI, in a presentation, listed factors that will drive fiscal slippages in the revised estimates of FY19, including "the Uday scheme in the past and farm loan waivers and income support schemes in the FY19 revised estimates," said a statement by the central bank.

The RBI also expressed its concern on the deviation in revised estimates, stating that the budget estimates presented during the beginning of FY20 had indicated a lower fiscal deficit.

In a statement that comes after a jump in devolution of revenues to states, the RBI stressed the "importance of states has increased" with the shift in composition of government finances, the statement said.

It also said the outstanding debt as percentage of GDP has been rising despite moderation in interest payment as percentage of revenue receipts.

Other key issues raised by Das, who was a member of the commission before being appointed as the governor last December, included necessity of setting up state finance commissions, public sector borrowings and "continuity of finance commission", the statement said.

In a special presentation on issues and challenges faced by states for market borrowings, the RBI discussed ways of increasing orientation of state government borrowing to markets, improving secondary market liquidity, risk asymmetry and increasing the corpus of Consolidated Sinking Fund and Guarantee Redemption Fund.

The presentation also spoke on cash management wherein the states need to improve their cash forecasting capabilities, the statement said.

The visiting Finance Commission team, led by chairman NK Singh, also had a meeting with senior economists and is likely to meet top bankers Thursday, after which it is likely to address a press conference.