On January 16, 2023, the Reserve Bank of India (RBI) released the annual report titled “State Finances: A Study of Budgets of 2022-23”, which provides data and analysis of the fiscal position of State governments in India for FY23.
- The theme of the 2023 Report is “Capital Formation in India – The Role of States”.
Key Fiscal Indicators:
i.The States’ capital outlay-GDP (Gross Domestic Product) ratio is budgeted to increase to 2.9 percent in FY23 from 2.3 percent in FY22.
ii.The ratio of revenue expenditure to capital outlay (RECO) for the States is budgeted to improve to 5.2 in FY23 from 6.1 in FY22.
iii.States’ consolidated Gross Fiscal Deficit (GFD) in FY21 rose to 4.1 percent of GDP, the highest level since FY05.
iv.For FY23, the States’ consolidated GFD is about 3.4 percent of GDP, which is within the Centre’s indicative target of 4 percent.
v.Expenditure:
- As per the data of the Comptroller and Auditor General of India (CAG), the State governments’ capital expenditure has grown at a rate of 7 percent in H1 FY23.
- The revenue expenditure of States increased by 20.7 percent in 2021-22.
vi.States’ debt to GDP ratio is projected to be higher at 29.5 percent by end-March 2023, as against 31.1 percent in 2020-21.
- Debt to GDP is still higher than 20 percent, which is recommended by Fiscal Responsibility & Budget Management (FRBM) Review Committee, 2018 (Chairman: Nand Kishore Singh).
Suggestions by RBI:
i.States are suggested by RBI to mainstream capital planning rather than treating them as residuals and first stops for cutbacks in order to meet budgetary targets.
ii.RBI also advised states to increase allocations of capital expenditure for sectors like health, education, infrastructure, and green energy transition to expand production capacities.
iii.States are suggested to create a Capital Expenditure (CAPEX) buffer fund during good times when revenue flows are strong. They are also instructed to encourage and facilitate higher inter-state trade and businesses to realise the full benefit of spillover effects of State CAPEX across the country.
-RBI advises states against reverting to OPS:
i.In the report, RBI stated risk over the subnational fiscal horizon due to restoring the Old Pension Scheme (OPS) by some States.
ii.RBI mentioned that under OPS, by postponing the current expenses to the future, the States risk the accumulation of unfunded pension liabilities in the coming years. The annual saving in fiscal resources that OPS entails is short-lived.
iii.Among the States, Chhattisgarh, Rajasthan, Punjab, and Himachal Pradesh have so far restored the OPS for government employees.
About OPS, NPS:
- Under OPS, pension was 50 percent of the last drawn salary of the employee and the entire amount was paid by the government.
- The OPS was discontinued and replaced with New Pension Scheme (NPS) on April 01, 2004.
- Under the New Pension Scheme, employees contribute 10 percent of their basic salary towards pension while the state government contributes 14 percent.
Note – The report was provided against the backdrop of the underlying dynamics of the state’s budgetary operations during 2020-21 (actuals), 2021-22 (revised estimates/provisional accounts) and 2022-23 (budget estimates). It has been prepared in the Division of State Finances of the Department of Economic and Policy Research.
About the Reserve Bank of India (RBI):
Governor – Shaktikanta Das
Deputy Governors – Mahesh Kumar Jain, Michael Debabrata Patra, M. Rajeshwar Rao, T. Rabi Sankar
Headquarters – Mumbai, Maharashtra
Establishment – 1935
