Mumbai: With reduction in states' fiscal deficit-GDP ratio, state governments are expected to strengthen their fiscal position in 2012-13 broadly in line with the fiscal roadmap, the Reserve Bank said Thursday.
"The improvement is reflected in the continued increase in surpluses in the revenue account of the majority of states, reduction in the fiscal deficit-GDP ratio and a declining trend in the debt-GDP ratio," RBI said in its report on State Finances: A Study of Budgets of 2012-13.
It said higher capital outlay budgeted for the year in many of the revenue surplus states indicates that the quality of expenditure is not being compromised in attaining the deficit targets.
"While some comfort can be drawn from the fiscal position of the state governments, states may have to exploit their potential for raising revenues and move towards convergence of tax rates in preparation for the shift to the goods and services tax regime."
During 2012-13, consolidated debt-GDP ratio of the states is expected to decline further and remain below the 13th Finance Commission recommended benchmark.
"The consolidated state government debt-GDP ratio...Is budgeted to further decline to 21.9 percent by end-March 2013," the report said.
The debt-GDP ratio has been declining since March 2004 and was at 22.6 percent as per the revised estimate of the budget. The debt-GDP ratio is lower than 13th Finance Commission's recommended benchmark for the year as well as the medium-term target of 24.3 percent for 2014-15.
Further it said, the consolidated revenue surplus is budgeted to increase to 0.4 percent of GDP in 2012-13 from 0.1 percent in 2011-12(RE).
Referring to tax efforts by the states, RBI said the proposed goods and services tax (GST) regime would reduce their flexibility in determining the rates for taxes that will get subsumed in the GST.
"Raising tax revenues then would depend more on improving eficiency and compliance by tightening vigilance and increasing the use of information technology for tax collections," it added.
Also it said the quality of expenditure needs to be improved by cutting down non-productive expenditure while increasing expenditure that would impart counter cyclical growth impulses to the economy.
As per the report, the state governments have been formulating policies to improve the delivery mechanism of government services and to make the government-citizen interface more friendly and transparent.
It further said, state governments have been accumulating large surplus cash balances since 2004-05.
Given that states have ample surplus cash balances and the GFD-GSDP ratio is envisaged to decline in the coming years, RBI said, it is essential that states adopt a need-based approach to their market borrowings.