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Reserve Bank of India (RBI) in its report 'State Finances: A Study of Budgets of 2022-23' has said states’ gross fiscal deficit (GFD) is budgeted to decline from 4.1 per cent of gross domestic product (GDP) in Covid-hit 2020-21 to 3.4 per cent of GDP in 2022-23 showing improvement in their fiscal health. It also advised States to continue to focus on creating a congenial ecosystem for greater private investments. It stated the fiscal health of the states has improved from a sharp pandemic-induced deterioration in 2020-21 on the back of a broad-based economic recovery and resulting high revenue collections. In 2022-23 States have budgeted higher capital outlay than in 2019-20, 2020-21 and 2021-22.

It mentioned ‘Going forward, increased allocations for sectors like health, education, infrastructure and green energy transition can help expand productive capacities if States mainstream capital planning rather than treating them as residuals and first stops for cutbacks in order to meet budgetary targets.’ Moreover, report said said it is worthwhile to consider creating a capex buffer fund during good times when revenue flows are strong so as to smoothen and maintain expenditure quality and flows through the economic cycle.

Further, it said to crowd in private investment, the State governments may continue to focus on creating a congenial ecosystem for the private sector to thrive. States also need to encourage and facilitate higher inter-state trade and businesses to realise the full benefit of spillover effects of State capex across the country. Besides, it said that as a part of institutional reforms, State governments need to set up Finance Commissions (SFC) in a regular and timely manner to decide on the assignment of taxes, fees and other revenues to local governments.