Mumbai: Calling upon States to expeditiously implement fiscal reforms, including improving transparency, Reserve Bank of India (RBI) today (May 10, 2004) asked State Governments to make efforts to enhance revenues, both tax and non-tax, for better budgetary flexibility and providing funds for social sector.

RBI, in its report on State Finances for 2003-04, also highlighted the need for reversing the trend of a decline in social sector expenditure as level of Government expenditure on this head is of "great significance" in developing economy.

Fiscal empowerment through revenue augmentation to facilitate higher development expenditure is crucial, it said.

The ratio of States' own tax revenue to Gross Domestic Product (GDP) has improved from 5.6 per cent in FY-02 to 5.9 per cent in FY-03 and was budgeted at six per cent in FY-04.

But in view of the committed nature of certain expenditure, States have been at times constrained to cut back their development outlays, it said.

"Such fiscal adjustments based on expenditure reduction could have adverse implications for the growth process," the Central Bank added.

A meaningful fiscal consolidation would necessitate rule-based fiscal framework backed by appropriate legislation, as underscored by the international experience, it said.

RBI said it was also imperative for States to augment their tax receipts through better tax administration, improve tax compliance and rationalisation of tax structure.

In tax reform process, implementation of Value Added Tax (VAT) at the national level still remains a challenge.

RBI said there was a need for further reform and reorientation on levies such as stamp duties and registration fees by making them "tax-payer friendly".

Adoption of appropriate user charges for services provided by the States would also help in augmenting the revenue base, it said.

Some States have already increased their user charges but recent initiatives taken by State Governments have not translated into any significant rise in their non-tax revenue receipts, as yet, it added.

Seeking more transparency in State budgetary operations, the Central Bank said it would enhance credibility of the fiscal stance of the State Government and also help investors to take informed decisions.

"Non-transparent fiscal practices are known to destabilise the financial balance, breed inefficiency in allocation and utilisation of resources and foster inequity," the Central Bank added.

The large and increasing gross fiscal deficit of States has led to a steady rise in outstanding debt of States in recent years and this has raised the issue of financial sustainability of State debt.

"Concerns on sustainability also arise from the fact that Government in future may have problems in marketing their debt," it pointed out.

RBI, on State Government guarantees, said it was vital that limits were placed on the value of guarantees that could be given by State Governments and adhered to in framework of a law.