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Review: RBI paper highlights the risk in the Finances of 10 States -Sai Krishna Muthyanolla

-Factly.in

The RBI recently published an article State finances and the Risk Analysis. The article aims to look at the fiscal vulnerability of Indian States & emphasises on ten heavily debt-burdened states in India based on the debt-GSDP ratio in 2020-21. These ten states also account for around half of the total expenditure by all state governments in India. Here is a review.

Effective and efficient public finance management is said to be a harbinger of good governance. In the wake of the scarcity of resources and the demand-supply mismatches, having a proper public financial management system becomes paramount. A sound public finance management system aids in delivering social and economic development goals. Having a proper flow and scheme for resource generation, allocation of the resources in an optimal manner, and utilizing these resources in an efficient and effective manner form the backbone of good public finance management.

It is therefore important to timely scrutinize and evaluate the state finances and identify the inherent risks in the system. Analysing the risks and chalking out strategies to minimize and mitigate them should be of primary concern to both, states as well as the Union Government. Considering the crisis in our neighbouring country Sri Lanka, this has assumed greater importance. In this regard, we look at the article on State finances and the Risk Analysis published by the Reserve Bank of India (RBI) and note the important observation. The article aims to look at the fiscal vulnerability of Indian States. The article emphasises on ten heavily debt-burdened states in India based on the debt-GSDP ratio in 2020-21. These ten states also account for around half of the total expenditure by all state governments in India.

The major motivation for undertaking such kind of assessment is the unfolding of the crisis in Sri Lanka and the COVID-19 pandemic. Apart from these two, the enactment of different kinds of public policies in terms of cash subsidies, provision of free utility services and so on, call for effective scrutiny of states’ financial health. 

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