States consolidated fiscal deficit at 2.6% of GDP in 2019-20

Outstanding debt of states rises to 25% of GDP, posing medium term challenges to its sustainability

The Reserve Bank of India (RBI) released the report titled "State Finances: A Study of Budgets of 2019-20", an annual publication that provides information, analysis and an assessment of the finances of state governments.

This year's Report analyses the underlying dynamics of budget estimates (BE) for 2019-20 against the backdrop of actual for 2017-18 and revised (and provisional accounts) outcomes for 2018-19.

States gross fiscal deficit (GFD) has remained within the Fiscal Responsibility and Budget Management Act (FRBM) threshold of 3% of gross domestic product (GDP) during 2017-18 and 2018-19.

For 2019-20, states have budgeted a consolidated GFD of 2.6% of GDP.

Outstanding debt of states have risen over the last five years to 25% of GDP, posing medium term challenges to its sustainability.

Revenue generation holds the key to prudent debt management - improving tax buoyancy by capitalising on technology enabled efficiency gains under the GST architecture, and raising user charges, wherever possible, should bolster revenue raising capacity.

Incipient risks to debt sustainability emanate from losses of Distribution Companies (DISCOMs) and from potential invocation of guarantees.

A combination of consolidation, reissuances and maturity elongation can help in improving liquidity and in developing a secondary market for state development loans (SDLs). Differential pricing of SDLs as per the risk profile of the states holds the key for better market discipline.

Going forward, it is important for states to pursue their capital expenditure plans as budgeted in 2019-20, considering that states account for two thirds of general government capital expenditure with implications for overall economic activity and welfare.

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