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RBI for more functional autonomy to civic bodies

🔴 According to the central bank, increasing the functional autonomy of the civic bodies, strengthening their governance structure and financially empowering them via higher resource availability through self-resource generation and transfers are critical for building resilience and effective interventions at the grass-root level.

By: ENS Economic Bureau | New Delhi |
Updated: December 2, 2021 6:22:09 am
Reserve Bank of India (File)

The Reserve Bank of India (RBI) has batted for more functional autonomy to civic bodies as the Covid pandemic has put severe strain on the third tier of the government.

“With the third-tier governments in India playing a frontline role in combating the pandemic by implementing containment strategies, healthcare, quarantining and testing facilities, organising vaccination camps and maintaining the supply of essential goods and services, their finances have come under severe strain, forcing them to cut down expenditures and mobilise funding from various sources,” the RBI said in its report on state governments’ finances.

According to the central bank, increasing the functional autonomy of the civic bodies, strengthening their governance structure and financially empowering them via higher resource availability through self-resource generation and transfers are critical for building resilience and effective interventions at the grass-root level.

“State governments should set up State Finance Commissions (SFC) at regular intervals, in line with the recommendations of FC XV,” it said. States may also urge rural and urban local bodies to make audited accounts available online in a timely manner to access grants. “In addition, States should undertake local body reforms as stipulated by the Centre to improve the financial autonomy of third-tier governments, the RBI said.

As the impact of the second wave wanes, state governments need to take credible steps to address debt sustainability concerns, the RBI said. The combined debt to GDP ratio of states, which stood at 31 per cent at end-March 2021 and is expected to remain at that level by end-March 2022, is worryingly higher than the target of 20 per cent to be achieved by 2022-23, as per the recommendations of the FRBM Review Committee, the report said.

However, the RBI said the state governments have proposed a reduction in fiscal deficit to GDP ratio. “For 2021-22, States have budgeted their consolidated gross fiscal deficit (GFD) to gross domestic product (GDP) ratio at 3.7 per cent, a marked improvement from the level of 4.7 per cent in the revised estimates for 2020-21, the year of the first wave of the pandemic,” it added.

This consolidation is sought to be achieved through higher revenue receipts in an environment of expanding vaccination coverage, waning of the second wave and removal of localised restrictions on mobility and activity, it said.

In 2021-22 so far, revenue receipts of states have posted robust growth, led by their own tax revenue from State GST, excise duty and sales tax collections, the RBI said.

Further, in 2021-22, state governments’ capital expenditure remains robust so far — the ratio of revenue spending to capital outlay (RECO) is budgeted to decline to 5.5 in 2021-22 from 6.7 in 2020-21.2 Within capital outlay, it is important for the states to channelise expenditure to sectors that crowd in private investments and optimise multiplier effects and inter-temporal and intersectoral linkages that boost output, employment and productivity, the RBI report said.

The gross and net market borrowings by state governments have been 13 per cent and 21 per cent lower than in the corresponding period of the previous year, respectively, in 2021-22 so far (April-September, 2021). States have preferred to borrow from financial accommodation provided by the RBI through short-term borrowing via the special drawing facility (SDF) and ways and means advances (WMA), it said.

In the medium term, improvements in the fiscal position of state governments will be contingent upon reforms in the power sector, the RBI said.

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