With improvement in economic growth, the financial position of the states has started showing improvement and they are moving towards the path of fiscal consolidation, the Reserve Bank of India (RBI) said in a report.
"The budgetary position of states in 2010-11 indicated a turnaround from the expansionary fiscal stance in 2008-09 and 2009-10 to a fiscal consolidation path in 2010-11," said State Finances: A Study of Budgets of 2010-11, released by the RBI.
An improvement in state finances is evident with a majority of the states budgeting either a revenue surplus or a lower revenue deficit in 2010-11 (Budget Estimate) as compared with 2009-10 (Revised Estimate), it said.
At a consolidated level, the revenue deficit is placed lower at 0.3% of GDP during 2010-11 (Budget Estimate) as against 0.7% in 2009-10 (Revised Estimate) reflecting compression in revenue expenditure.
The study said, "While the overall macroeconomic environment and pace of economic recovery would remain important for state finances, other factors including implementation of goods and services tax (GST), states' own efforts towards mobilising non-tax revenues and prioritisation/rationalisation of expenditure would have implications on fiscal consolidation at the state level."
It suggested that for credible progress towards fiscal consolidation, states need to amend their Fiscal Responsibility and Budget Management (FRBM) Acts and workout a fiscal reform path.
It said states also need to review their tariff policies, especially those relating to the power and irrigation sectors.
Besides, it added that better allocation of expenditure along with improved transparency and accountability through stricter audit procedures would be desirable to ensure improvement in resource use and fiscal management.
States need to put in place an effective forecasting and monitoring mechanism for their cash inflows and outflows so that a need-based approach to market borrowings is adopted, the study said.
The strengthening of State Finance Commissions is essential to ensure allocation of adequate resources to local bodies, keeping in view their developmental role for the purpose of inclusive growth, it added.
The study also noted that despite the extra expenditure obligations emanating from the implementation of revised pay structures and fiscal stimulus measures, the impact in terms of debt-GSDP ratios remained muted in most states during 2008-09 and 2009-10.
Aggregate debt-GDP ratio at 25% in 2009-10 was well below the level of 30.8% recommended by the Twelfth Finance Commission, it said.
