Addressing a gathering of state finance secretaries Reserve Bank of India (RBI) Governor D Subbarao asked states to focus on the quality of fiscal consolidation and also on expenditure compression.
He called for the need to explore ways for better cash management and adequate dissemination of information on state finances.
Considering the rise in market borrowing of states, inflation risks and banks' excess investments in statutory liquidity ratio (SLR) securities, he said managing state government bond issue would be challenging in 2013-14.
It may be noted that gross market borrowing by states and Union Territories rose to Rs 177,300 crore in 2012-13 from Rs 158,600 crore in the earlier year.
He wants state government to consolidate their fiscal position through better coordination with stakeholders. He added global arguments on debt sustainability and fiscal austerity had to be examined in the Indian context. To understand the dynamics of debt sustainability in India, RBI would conduct a study on the issue.
In order to control inflation, he asked states to raise productivity in agriculture, improve infrastructure and streamline the public distribution system.
The cost of borrowings (weighted average yield) firmed up on account of an increase in states' gross market borrowings.