The introduction of GST will have economy-wide ramifications and holds the "best bet" for state governments to improve their finances without cutting productive expenditure, the Reserve Bank said on Friday.
The Goods and Services Tax regime is likely to champion a new course for cooperative federalism in India, focusing on collaboration between the Centre and states, it said.
"Introduction of GST would have economy-wide ramifications in terms of growth, inflation, government finances and external competitiveness over the medium-term," RBI said in 'State Finances: A Study of Budgets of 2016-17'.
Referring to the challenges, it said GST implementation should be addressed through a robust dispute resolution mechanism and the Goods and Services Tax Network (GSTN) is expected to provide the necessary information technology (IT) infrastructure to all stakeholders.
GSTN is the IT backbone of the country's largest tax reform which is scheduled to be rolled out from July 1.
"GST remains the best bet for state governments in returning to the path of fiscal consolidation without compression of productive expenditure," it said.
It further said that from a medium term perspective, debt sustainability of states is likely to be the key factor in shaping the evolving contours their finances.
As per RBI, greater devolution of resources through statutory transfers would provide states with the flexibility to prioritise their expenditure in sync with their development objectives.