Financing the growth of infrastructure remains a major concern for the Reserve Bank of India.

Its annual report has said that the composition of expenditure of states as well as the stock of infrastructure assets have deteriorated substantially due to neglect of cost recovery.

The RBI observed that the ability of the states to improve physical and social infrastructure is severely limited due to the deterioration in the state finances. This has led to compression of social and economic overheads.

Another important factor constraining the states' ability to undertake developmental activities is that of increasing pension payments, which rose from less than three per cent of revenue receipts in early 1980s to around 10 per cent of the revenue receipts in 2001-02.

The central bank pointed out that the principal issue is the levy and collection of appropriate user charges on the array of social and economic services, which the states provide (e.g. water supply, sanitation, sewerage, transportation, education, and medical facilities).

It felt that provision of public goods has to be made from tax resources whereas private goods and services should be financed by the levy of appropriate user charges.

User charges need to be indexed to input costs and the process of periodic revision should become automatic, along with appropriate provision for productivity improvements.