State Finances: A study of Budgets of 2022-23

State Finances: A study of Budgets of 2022-23

News: Recently, the Reserve Bank of India (RBI) has released a report stating that the Gross Fiscal Deficit (GFD) of states is expected to decrease to 3.4% of Gross Domestic Product (GDP) in 2022-23, from 4.1% in 2020-21.

What is Gross Fiscal Deficit?
• GFD measures the overall financial health of the state government and is calculated by subtracting total revenue from total expenditure.
• A decrease in GFD is generally considered a positive sign as it indicates that the state government is able to balance its revenue and expenditure more effectively.

Key Findings:
• The report titled 'State Finances: A Study of Budgets of 2022-23' is a comprehensive analysis of the financial position of the Indian states, including the trends and challenges in their revenue and expenditure.
• According to the RBI report, states' debt is expected to decrease to 29.5% of GDP in 2022-23, compared to 31.1% in 2020-21.
• However, the report also highlights that this is still higher than the 20% recommended by the Fiscal Responsibility and Budget Management (FRBM) Review Committee in 2018.
• States are anticipating an increase in non-tax revenue, which is generated from sources such as fees, fines, and royalties. This increase is likely to be driven by revenue from industries and general services.
• The report notes that states are expecting to see an increase in revenue from various sources such as State GST, excise taxes, and sales taxes in the 2022-2023 fiscal year.

Key measures suggested by RBI:
• Debt consolidation should be a priority for state governments.
• Allocating more resources to key sectors such as healthcare, education, infrastructure, and green energy, the states can promote economic growth and development.
• Create favorable environment for private sector to invest in the states.
• States also need to encourage and facilitate higher inter-state trade and commerce to realize the full benefit of spillover effects of state capex across the country.
• The report is proposing that it would be beneficial to establish a fund that would be used to buffer capital expenditure during periods of strong revenue growth. The purpose of this fund would be to maintain a consistent level of spending on capital projects, and to ensure that spending on these projects is not drastically reduced during economic downturns.