Context: Recently, the Reserve Bank’s annual publication titled 'State Finances: A Study of Budgets of 2021-22' was released.

• The report provides information, analysis and an assessment of the finances of State governments for 2021-22 against the backdrop of actual and revised (or provisional accounts) outcomes for 2019-20 and 2020-21, respectively.

Key highlights of the Report

• The combined debt-to-GDP ratio of states is expected to remain at 31 % by end-March 2022.
• The State government’s interest payments and debt servicing during the current financial year is pegged higher than the revised estimates of the previous financial year.
• For 2021-22, States have budgeted their consolidated gross fiscal deficit (GFD) to gross domestic product (GDP) ratio at 3.7 %, a marked improvement from the level of 4.7 %in the revised estimates for 2020-21.

Key Suggestion

• States could repair their finances on the back of a recovery in revenue collection and greater certainty on the GST compensation cess.
• States should channelise expenditure to sectors that crowd in private investments and optimise multiplier effects that boost output, employment and productivity.
• The multiplier effect refers to the proportional amount of increase, or decrease, in final income that results from an injection, or withdrawal, of capital.
• State governments need to take credible steps to address debt sustainability concerns.
• A country's public debt is considered sustainable if the government is able to meet all of its current and future payment obligations without exceptional financial assistance or going into default.
• States should increase the functional autonomy of the civic bodies, strengthen their governance structure and empower them financially to build resilience.
• State governments should set up State Finance Commissions (SFC) at regular intervals, in line with the recommendations of 15th Finance Commission.
• States may also urge rural and urban local bodies to make audited accounts available online in a timely manner to access grants.