Sunday, April 3 2005 10:06 Hrs (IST) - World Time -

New Delhi: Ahead of a meeting aimed at improving the fiscal health of States, Reserve Bank of India (RBI) has said that they need to enact fiscal responsibility laws, as the present corrective measures were "discretionary and lacked statutory backing."

The meeting, to be held on April 8, in Mumbai, will be jointly organised by RBI and Finance Ministry, and will discuss the deteriorating financial position of the States, caught in a vicious cycle of debt and deficit.

The State finance secretaries would discuss, among other things, the road map for bringing in a fiscal legislation along the lines of Centre's Fiscal Responsibility and Budget Management Act, suggested by the 12th Finance Commission.

In a recent bulletin, RBI, however, cautioned that unless there was political commitment to adhere to a sustainable fiscal adjustment process enshrined in the fiscal legislation act, the rules, howsoever well designed and elegantly framed, could be "bypassed and policies reversed to the detriment of the long term financial health of States."

"Persistently large revenue deficit had led to higher fiscal deficit and build-up of large debt stock. Consequently, a vicious cycle of deficit, debt and debt service payments has emerged," the banking regulator said in its latest bulletin.

Along with these factors, the contingent liabilities of the States have also increased, thus leading to fiscal stress, which "seriously" constrained their ability to discharge the primary responsibility of developing social and economic infrastructure, RBI said.

Expressing concern over the fiscal performance of States, the RBI bulletin listed out various factors like rising pension liabilities, large administrative spending, losses incurred by State-level public sector undertakings, inadequate tax buoyancy, inappropriate user charges and slowdown in central transfers for the financial stress.

In view of the concerns, several States had made efforts to correct fiscal imbalances through the medium-term fiscal reform programme, but such measures, though serving some useful purpose, were somewhat "discretionary and hence lacked statutory backing," it said.

"On the contrary, adoption of fiscal policy rules built under responsibility legislation commits the Government to a deficit or debt reduction path, it said, emphasising that the objective of such legislation would need to be broadened to include local bodies, the Third Tier of the Government.

The institutional framework of the fiscal legislation facilitates effective monitoring of fiscal performance of the Government and encourages pursuit of fiscal management policies aimed at transparency, efficiency, responsibility, fairness and stability, RBI said.

"While such legislation cannot be panacea for all fiscal ills and have their own drawbacks, they provide a basis for political consensus to accomplish complex economic tasks and thereby enhance the credibility of the Government," it said.