Non-productive expenditure of state governments rcontinue to be a reason for worry and their growing liabilities need redressal, even though there has been some progress in this regard, the Reserve Bank of India (RBI) has said in a report.
"The rising trend in the committed expenditure to gross state domestic product ratio in recent years is a cause for concern," the central bank said in its latest report on state finances, calling for steps to step up the output.
Committed expenditure includes interest payment, pensions and administrative services and is set to rise further upon the implementation of the 7th Central Pay Commission recommendations, which may also have a cascading impact on the salaries and pension burdens on states, the RBI said.
Such expenditure is a key fiscal drain on states and inhibit money for development purposes.
The report said one solution is for states to expand faster than the rate at which such expenses are growing. "Capital outlay must go up significantly. But states are not able to step it up dramatically," Ajitava Raychaudhuri, economist at Jadavpur University said in Kolkata.
According to the report, states in general raised the average capital outlay to their output by 0.6 percentage points after implementing the steps under fiscal responsibility and budget management from 1.8 percent to 2.4 percent.
"But this is not a significant increase," Raychaudhuri said.
The report said aggregate capital expenditure of states remained almost stagnant over the years as a proportion to the state output. The banking regulator also said states do not sacrifice growth-inducing expenditures within the overall framework of fiscal consolidation.
"Every state has its own comparative advantage. Each state should identify and develop them via its own resources or public-private partnership. This will create more assets and ensure future flow of income," Dipankar Dasgupta, economist at Indian Statistical Institute said.