The Economic Survey 2016-17 presented in parliament by Finance Minister Arun Jaitley on Tuesday said good fiscal performance by states needed to be incentivised to track overall performance.
"Greater reliance will need to be placed on incentivising good fiscal performance, not least because states are gradually repaying their obligations to the Centre, removing its ability to impose a hard budget constraint on them," a statement quoted the survey as saying.
The survey said fiscal challenges mount for the states because of the "Pay Commission recommendations" and "mounting payments from the UDAY bonds".
There is a need to review "how fiscal performance can be kept on track", it said.
The Centre's Fiscal Responsibility and Budget Management (FRBM) Act was mirrored by Fiscal Responsibility Legislations (FRL) adopted in the states, it said.
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Incentivising good performance by the states will require "the Centre to be an exemplar of sound fiscal management itself".
According to the survey, there has been an improvement in the financial position of the states over the last few years.
The average revenue deficit has been eliminated, while the average fiscal deficit was curbed to less than three per cent of GSDP (Gross State Domestic Product). The average debt to GSDP ratio has also fallen.
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