Calling upon states to expeditiously implement fiscal reforms, including improving transparency, Reserve Bank of India on Monday 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 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 rationalise tax structure.
In tax reform process, implementation of value added tax at the national level still remains a challenge.
More from rediff