Y V Reddy, deputy governor, Reserve Bank of India (RBI), today made a strong pitch for pushing financial sector reforms at the state level.
Speaking at India States Reform Forum organised by the World Bank at New Delhi today, Reddy said, "Commercial activities such as power, transport, water for irrigation will have to be fully funded and operated commercially to reduce fiscal burden and also to attract funds from financial sector, especially banks. To the extent cross-subsidisation is deemed necessary, it should be self-balancing with no burden on either the fisc or banks."
The RBI deputy governor insisted on strengthening the state machinery relating to law and order situation and provision for delivery of essential services not only to serve the needs of the poor and the underprivileged but also to attract resources from the financial sector for investments in physical infrastructure and productive activities.
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"Improving the delivery of services should be the priority," he said. However, Reddy cautioned that the approach will only be feasible "if the cost recovery for commercial activities is total, with self-balancing cross-subsidisation."
"To avoid seepage and misuse of concessions, the extent of cross-subsidisation should be limited," he pointed out. Reddy stressed the need of increasing the public investment in agriculture as it will facilitate employment generation and poverty alleviation.
In the context of states' fiscal reform, the RBI is addressing some of the major issues. For instance, the ways-and-means arrangements and overdraft scheme are being reviewed by the state finance secretaries in the light of Vithal committee recommendations. The RBI group will finalise the report by December, Reddy said.
The central bank is also preparing a technical paper on the state finances to facilitate the subscription to the state loan auctions.
Besides these, Reddy also mentioned that there are a few states whose cash and budgetary positions have some linkage with consortium arrangements for food credit. The RBI is reviewing the situation. An announcement to this effect was made in the October credit policy.