Flagging the risks of fiscal slippage and liquidity squeeze, the Reserve Bank of India on Tuesday said state governments must bring more discipline in expenditure and improve coordination in their market borrowing.
The large borrowing requirements by central and state governments could crowd out credit to the private sector. Such phenomena will become critical if there is fiscal slippage, RBI governor D Subbarao said in his inaugural address at the State Finance Secretaries’ conference here.
Market borrowing by states has also gone up, attaining a critical mass alongside the huge and rising market borrowing by the Centre. Therefore, there was need for coordinated debt management to avoid pressure on liquidity and crowding out, he added.
He said states should spread borrowing through the year and file a tentative schedule in advance. Fiscal consolidation at the state level needs special attention, with focus on expenditure restructuring. There is greater need to improve the tax to GDP ratio so that debt remains sustainable, he said. The 25th Conference of the State Finance Secretaries was held at the RBI here. Finance secretaries of 26 states participated.
The governor also underlined the importance of reforms in the power sector to insulate states’ finances. Central and state governments have an important role in generating and promoting the supply response to so manage inflation within a comfortable zone and at the same time stoke output, he said.
Other issues discussed on Tuesday were management of cash balances and market borrowings of state governments for 2012-13, plus strengthening of the Consolidated Sinking Fund. Secretaries also discussed the risk to state finances from the increasing losses of power distribution utilities and payments of commission by state governments to encourage electronic benefit transfers through banks.