The Reserve Bank has warned about the risk to debt sustainability of state governments that could arise of losses of Distribution Companies- DISCOMs and from the potential invocation of guarantees. Outstanding debt of states have risen over the last five years to 25 per cent of GDP, posing medium term challenges to its sustainability, the central bank in its latest report on state government finances.Revenue generation holds the key to prudent debt management - improving tax buoyancy by capitalizing on technology-enabled efficiency gains under the GST architecture, and raising user charges, wherever possible, should bolster revenue-raising capacity.The report advises state governments that they must not compromise on their social and capital expenditures as they have profound macroeconomic and social implications as evident in the slowdown in economic activity in India which is leading and coincident with the cutback in spending by states.States have to balance aspirational policy choices against two major operating constraints: generating adequate revenue within the Legislative Framework and adhering to Fiscal Responsibility.