States’ gross fiscal deficit may dip to 3.4% this year from 4.1% in FY20: RBI study

• According to an RBI study, the fiscal health of States has improved from a sharp, pandemic-induced deterioration in 2020-21 on the back of a broad-based economic recovery and high revenue collections.

Highlight

• The gross fiscal deficit of States is budgeted to decline from 4.1% of gross domestic product (GDP) in 2020-21 to 3.4% in 2022-23.
• While States’ debt is expected to ease to 29.5% of GDP in 2022-23 against 31.1%in 2020-21, it is still higher than the 20% recommended by the N.K. Singh Committee for reviewing FRBM Act, in 2018, warranting prioritisation of debt consolidation.

Productive capacities

• Increased allocations for sectors such as health and education can help expand productive capacities if States mainstream capital planning rather than treating them as first stops for budgetary cutbacks.
• “It is worthwhile to consider creating a capex buffer fund during good times when revenue flows are strong so as to maintain expenditure flows through the economic cycle.

Prelims Take Away

• RBI
• FRBM Act
• Capex Buffer Fund
• GDP
• Fiscal Deficit