Mumbai, Aug. 30: The Reserve Bank of India (RBI) has called for a close monitoring of end-use of funds made available to state level enterprises. The tendency to divert funds raised by public enterprises, ostensibly for commercial purposes, to support budget operations of some states emerged as a serious problem in recent years, the central bank said in its annual report for 2001-02 released today. Such diversions lead to erosion of fiscal transparency and as they grow in size, they have the tendency to distort both the fiscal and financial systems of the economy, it said.
The fiscal position of the state governments had remained under pressure throughout the 90s. The large magnitude of committed expenditure like salaries, pensions and interest payments had severely constrained the states’ ability to undertake developmental activities, the apex bank observed in its report.
Recent policy initiatives by the states reflected the growing urgency for fiscal stabilisation and reforms. Each state has devised its own strategies, yet a common thread runs through them all — expenditure containment, revenue augmentation, reforms of public enterprises and reduction in subsidies.
The RBI pointed out that fiscal empowerment, by augmenting the volume and scale of the tax and non-tax revenue flows into the Budget, holds the key to fiscal consolidation in India. “Revenue maximisation required the tax system to be reformed by widening the tax base, simplification of rules, review of exemptions/incentives and strict tax compliance along with extensive use of IT and data warehousing,” it noted.
It was also necessary to design a long-term tax policy that would obviate the need for a large number of tax changes every year and provide stability to the tax system. The report said that lack of an effective and simple tax regime has been an important factor leading to a decline in the tax/GDP ratio.
However, the Reserve Bank expressed concern over poor returns on investment in public sector enterprises (PSEs) and statutory corporate enterprises. Loss making PSES need to be restructured so that their profitability could be a major source of resource generation and support to government finances.
Welcoming the successful completion of strategic sale of some public sector undertakings, the apex bank said “the real challenge, however, lies not merely in closing down non-viable PSUs but in restructuring the potential viable ones and significantly scaling down of government equity stakes in all non-strategic areas.”
It noted that though explicit subsidies provided by the Centre have declined, there was a wide range of hidden subsidies that need to be contained. Moreover, proper targeting of subsidies was needed to reduce leakages and misappropriation and in this regard, it appreciated the dismantling of administered price mechanism (APM).