RBI calls for credible roadmap to tackle high state debt

The Reserve Bank of India (RBI) has called for a "clear and time-bound" plan to manage state government debt. It suggests states should uniformly report all financial obligations, including hidden debts and guarantees. The RBI has also emphasised the need for better spending efficiency and budgets focused on results and climate action.

Stressing the role of State Finance Commissions (SFCs), the RBI said in a report on Thursday that timely and adequate transfers to local bodies by states is vital for strengthening decentralised governance. It will enable panchayats and urban local bodies to fulfil functions in service delivery and ensure better infrastructure.

It says there is scope for further improvement in expenditure efficiency, outcome and climate or green budget, data reporting and use of modern techniques like AI and machine learning. "Concerted efforts by States in these areas will pave the way for higher economic growth with macroeconomic stability."

The central bank says strengthening of state finance commissions is "critical" for ensuring adequate and timely fund transfers to local bodies. "While the progress in improving postpandemic state finances is commendable, a durable fiscal consolidation must mark the way forward," the report says.

It finds that there's a "sharp rise" in expenditure on subsidies. These are driven by farm loan waivers, free or subsidised services (like electricity to agriculture and households, transport, gas cylinder) and cash transfers to farmers, youth and women. The RBI says states must "contain and rationalise their subsidy outgoes". This will ensure spending does not crowd out more productive expenditure.

Second, the central bank says, too many central government schemes reduce flexibility of state government spending and dilute the spirit of cooperative fiscal federalism. "Rationalisation of centrally sponsored schemes (CSS) can free up budgetary space to meet state-specific expenditure needs and reduce the fiscal burden."

The RBI says the persistently high level of subnational debt calls for a credible roadmap for debt consolidation. "States with elevated debt levels may establish a clear, transparent and time-bound glide path for debt consolidation."

The timely availability of reliable and comprehensive data is crucial for the fiscal risk assessment of states, says the RBI. States must provide data on outstanding liabilities in a uniform format in their budget documents, says the RBI. "This will improve the quality of subnational finances."

States must also do uniform reporting of contingent liabilities and off-budget borrowings, advises the RBI. The apex bank feels consistent reporting of off-budget borrowings would enhance fiscal transparency and can lead to lower borrowing costs.

Public expenditure efficiency is another area that demands improvement. States can do so by implementing outcome budgeting, i.e., linking spending to measurable outcomes, to foster accountability and targeted resource use, it adds. "Such an approach would prioritise allocations for sectors with meaningful economic and social benefits." It also provides citizens an insight of how their tax money is being utilised.

The RBI also calls for adopting climate budgeting into fiscal planning to enhance climate budgeting practices. This can help in entrenching climate change action within the development frontier, it feels.

Timely availability of quarterly fiscal data of states is also crucial, especially in the context of the G20 data gaps initiative-2 (DGI-2). "The CAG may improve the depth and granularity of states’ monthly accounts and consider releasing a consolidated position at least on a quarterly basis," says the RBI.

Additionally, states generate vast micro-data that remain underutilised. "States could harness capabilities, either within their Finance Departments or Directorates of Economics and Statistics, or through partnerships with technical institutions to leverage this data for improved public policy and better governance."