The Reserve Bank of India raised a couple of red flags in the annual report on state finances released on Thursday.
The report added that visible fiscal pressures are emerging for several states on the expenditure side, particularly on account of pay revisions, interest payments and other state-specific schemes like farm loan waivers.
States budgeted a gross fiscal deficit (GFD) to gross domestic product (GDP) ratio of 2.7 per cent in 2017-18, the revised estimates place it at 3.1 per cent, essentially due to shortfalls in own tax revenues and higher revenue expenditure, the report added.
The GFD-GDP ratio crossed the threshold for the third consecutive year.
For 2018-19, the states have budgeted for a consolidated GFD of 2.6 per cent of GDP. This consolidation is aimed to be facilitated by the expansion in revenues as the goods and services tax (GST) stabilises and gains traction.
“External debt sustainability has emerged as a corporate sector risk in view of the recent appreciation of the US dollar and US dollar funding gaps. Second, states borrowing costs have been rising steadily, with their bond issuances attracting premium on the centres bond yields,” RBIs report added.
It also said that the GST and the e-way bill implementation could boost the tax base and lock in efficiency in tax administration, re-prioritising expenditures seems essential to avoid further fiscal slippage.