States' debt rising despite moderation in interest payment, RBI tells Finance Commission

The fiscal deficit of states is budgeted to be lower in 2019-20 but revised estimates and actuals deviate significantly which reflect poor fiscal marksmanship, the Reserve Bank of India (RBI) said on Wednesday.

Their outstanding debt as percentage of gross domestic product (GDP) is rising despite moderation in interest payment, said the central bank in a presentation before the 15th Finance Commission here.

Specific factors driving fiscal slippages include UDAY, or Ujwal Discom Assurance Yojana, in the past besides farm loan waivers and income support schemes in 2018-19 revised estimates, said the central bank adding that importance of states in the economy has increased with the shift in composition of government finances.

The 15th Finance Commission headed by Chairman N K Singh held a detailed meeting with RBI Governor Shaktikanta Das and Deputy Governors, according to an official statement.

The RBI has called for setting up state finance commissions for state governments. It discussed public sector borrowing requirements and continuity of the Finance Commission in view of the fiscal management requirements of the states.

The central bank also stressed the need for expenditure codes, especially given that expenditure norms vary from state to state. It highlighted the growing role of states in managing growth, inflation and ease of doing business.

In another presentation, the RBI called for increasing orientation of state governments' borrowings from capital markets. This will improve secondary market liquidity with re-issuances, non-standard issuances and widening investor base.

During its two-day visit to Mumbai, the Finance Commission is slated to have meetings with banks, financial institutions and economists as well.