Make more transfers to states conditional, urges central bank

THE RESERVE BANK of India has urged the Finance Commission to consider recommending "an increased share of conditional transfers" to the state governments, based on reforms, quality of expenditure and fiscal sustainability. This, it said, would help harness healthy competition across the states, and strengthen the fiscal consolidation drive.

The RBI's comments comes shortly after the Cabinet approval for the terms and reference of the 16th Finance Commission (FY27-31).

In its "State Finances: A Study of Budgets of 2023-24" released on Monday, the RBI revealed that the states continued with fiscal consolidation in FY23 with their combined fiscal deficit contained at 2.8% of Gross Domestic Product (GDP) for the second year in a row. As a result, the debt-GSDP ratio came down from 29.3% in FY22 to 27.5% in FY23, the report said, citing the revised estimates (RE).

The overall fiscal outlook for states remained favourable in 2023-24 too, the RBI, which is also the manager of the country's public debt, said, adding that states have adequate fiscal space for undertaking higher capex. At the individual level, however, the debt-GDP ratio and fiscal deficit for some states remained high.