States Should Mainstream Capital Expenditure Planning: RBI

According to the report, the capital spending by states saw a robust 31.7% growth on year at INR 5.89 trillion in FY22

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The Reserve Bank of India, on Monday, released a report saying that States should mainstream capital expenditure planning rather than treating them as residuals and first stops for cutbacks to meet budgetary targets. The report titled 'State Finances: A Study of Budgets of 2022-23', is an annual publication that provides information, analysis and an assessment of the finances of state governments for 2023 against the backdrop of actual and revised/provisional accounts for 2020-21 and 2021-22 respectively. The theme of this year's report is 'Capital Formation in India – The Role of States'.

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According to the report, the capital spending by states saw a robust 31.7% growth on year at INR 5.89 trillion in FY22. Strong growth in tax and non-tax revenues, coupled with the advancement of payment by the Centre of tax devolution and GST compensation, provided the required fiscal space to accelerate capex.

The RBI report further stated that the fiscal health of the states has improved from a sharp pandemic-induced deterioration in 2020-21 on the back of a broad-based economic recovery and resulting high revenue collections. It also noted that the states' gross fiscal deficit (GFD) is budgeted to decline from 4.1% of gross domestic product in 2020-21 to 3.4% in 2022-23.

The report stated that in 2022-23, States have budgeted higher capital outlay than in 2019-20, 2020-21 and 2021-22. "Increased allocations for sectors like health, education, infrastructure and green energy transition can help expand productive capacities if States mainstream capital planning rather than treating them as residuals and first stops for cutbacks in order to meet budgetary targets," added the report

Moreover, the Central bank also advised States to continue focus on creating a congenial ecosystem for greater private investments and also urged the states to encourage and facilitate higher inter-state trade and businesses to realise the full benefit of spillover effects of State capex across the country.

"It is worthwhile to consider creating a buffer fund during good times when revenue flows are strong so as to smoothen and maintain expenditure quality and flows through the economic cycle," said RBI in the report.