For 2019-20, states have budgeted a consolidated GFD of 2.6 per cent of the GDP.

“Revenue generation holds the key to prudent debt management — improving tax buoyancy by capitalising on technology enabled efficiency gains under the GST architecture, and raising user charges, wherever possible, should bolster revenue raising capacity,” the RBI report said.

The report also said there were incipient risks to debt sustainability due to losses of power distribution companies, and from potential invocation of guarantees. According to the report, combination of consolidation, reissuances and increasing maturity can help in improving liquidity and in developing a secondary market for state development loans (SDLs). “Differential pricing of SDLs as per the risk profile of the states holds the key for better market discipline,” the report said.

However, the RBI is yet to develop such differential pricing. B P Kanungo, the RBI’s deputy governor had said in a post-policy conference that such differential pricing is proving to be a challenge as by nature the SDLs are safe, considering the guarantees provided by the state governments.

“Going forward, it is important for states to pursue their capital expenditure plans as budgeted in 2019-20, considering that states account for two thirds of general government capital expenditure with implications for overall economic activity and welfare,” the report said.