Indian states' finances improve, gross fiscal deficit expected to decline in 2022-23: RBI

The debt of the States is expected to ease from 31.1 percent of GDP in 2020–21 to 29.5 percent in 2022–23, although it is still more than the 20 percent suggested by the Fiscal Responsibility and Budget Management Review Committee in 2018, which the RBI stated justifies giving debt consolidation priority.

The central bank also advised governments to set up a fund for longer-term expenditure when revenue collection is strong.

"It is worthwhile considering creating a capex buffer fund during good times...to smoothen and maintain expenditure quality and flows through the economic cycle," the central bank added.

States are boosting current expenditures, such as that wages, interest payments, and subsidies, at a faster rate in the current fiscal year than they are spending on longer-term infrastructure projects.

Despite a significant increase in federal government capital expenditures, which has an impact on economic growth, the report found that state capital spending expanded by just 0.9 percent from April to October of the previous year.

The RBI stated that states may not meet their capital expenditure goals for the entire fiscal year but are still expected to have accelerated such spending in the second half. "This low capital outlay partly reflects the tendency to back-load expenditure in the latter half of the year," it added.

It also stated that more funding for fields like health, education, infrastructure, and the switch to renewable energy can assist enhance productive capacity in the future. It is prudent to think about setting up a capex buffer fund while revenue flows are robust, the RBI informed.