The Reserve Bank of India (RBI) has raised concerns about the fiscal management of some states, saying they have budgeted for deficits exceeding 4 per cent of Gross State Domestic Product (GSDP) in Financial Year 2023-24 (FY24). The national average is 3.1 per cent.
These states have debt levels surpassing 35 per cent of GSDP compared to the national average of 27.6 percent, said the RBI in a report on Monday. Any additional allocation for “non-merit goods and services”, subsidies, transfers, and guarantees could jeopardise the “fragile fiscal situation” of these states, potentially disrupting the overall fiscal consolidation achieved over the past two years.
Highlighting the medium-term challenges to fiscal sustainability, the report underscored the risks associated with some states contemplating a return to the old pension scheme (OPS). The RBI warned that such a shift could impose a substantial burden on state finances, limiting their capacity to undertake growth-enhancing capital expenditures.
The central bank’s estimates suggest that if all states revert to OPS from the National Pension System (NPS), the cumulative fiscal burden could balloon to 4.5 times that of NPS with an additional burden of 0.9 per cent of GDP annually by 2060. The reversal could impact the pension obligations of older OPS retirees, extending until the 2060s, marking a significant setback that undermines past reforms and compromises the interests of future generations.
The report said a strategic approach to bolster fiscal capacity, emphasising uninterrupted and efficient delivery of social, economic, and general services. The implementation of the Goods and Services Tax (GST) has helped in formalising the economy and expanded the tax base without imposing undue burdens. The RBI report recommended that enhancing tax administration, incorporating data analytics to curb evasion, and reinforcing the institutional strength of state revenue departments will likely augment fiscal capacity.
In order to incentivise states in boosting tax revenue collections, the report suggested considering financial incentives. Additionally, for sustained fiscal consolidation, the RBI recommends a potential examination of reinstating fiscal efficiency parameters.
First Published: Dec 12 2023 | 2:14 PM IST