Taking forward the dialogue with states on fiscal management, finance minister Arun Jaitley on Monday advised them to adhere to fiscal discipline, spend more on infrastructure and use Aadhaar for transferring benefits to people.

“The tendency to spend on non-developmental activities may in the short term appear to be attractive, but in the longer run, it doesn’t reap results,” Jaitley said, addressing the second conference of state finance secretaries here.

Following the 14th Finance Commission’s recommendation, states’ share in Central taxes has been enhanced by 10% to 42% for FY16-FY20 as against 32% in the previous finance commission award period.

“We have seen that ever since we have shown this tendency of spending more yet sticking to fiscal discipline, this has brought immediate results in terms of interest rates and India’s credibility,” the minister said, emphasising on improving quality of spending.

Despite pressure on finances, the Centre managed to keep fiscal deficit within the targeted level of 3.9% of GDP in FY16 and has stuck to the target of 3.5% for FY17, which nudged the central bank to cut policy interest rates.

“We also have to ensure that some states depending on parameters have been given some additional fiscal space, but all of us will have to learn to live and spend within means and stick to fiscal discipline,” Jaitley said.

Acceding to the recommendations by the 14th Finance Commission for the 2015-20 period, the Centre has approved a fiscal deficit target of 3% for states that have had a favourable debt-GSDP ratio and interest payments-revenue receipts ratio in the previous two years. In order to facilitate the states taking over most of the debts of their electricity boards under the UDAY scheme, the Centre had said these liabilities won’t be counted for fiscal deficit for two years.

Despite the budgeted reduction in gross fiscal deficit (GFD) to GDP ratio in FY16 to 2.4% from 2.9% in FY15, outstanding liabilities of states could increase on account of the phased takeover of bonds issued by power discoms. Enduring improvements in the quality of states’ finances in the medium term hinges around improving the viability of discoms and the revival of state-level public enterprises (SLPEs), alongside the rationalisation of centrally sponsored schemes, the Reserve Bank of India said in a report recently.

To plug leakages, the minister sought greater reliance on Aadhaar-based direct benefit transfer. He said national focus is on larger expenditure on social sector, infrastructure creation and rural areas, which have conventionally been found lacking in the past.

Talking on the occasion, finance secretary Ratan P Watal said states need to enhance capital expenditure and invest more in rural areas and infrastructure while containing subsidies. Total transfers to states including grants in aid from the Centre to state are estimated to be Rs 9.47 lakh crore in FY17 as compared to Rs 8.36 lakh crore during FY16, Watal said.