From an average of 2.7% in much of the 1990s to 4.1% in the 1998-2004 period, the fiscal deficit to GDP ratio for states fell to 2.3% in the 2004-08 boom years, then rose to 2.7% in the next two years, and is projected to fall to 2.1% in the current financial year. The progress across states, needless to say, is not uniform but the important thing to keep in mind is that in FY11, 3 non-special category states saw a deterioration in their fiscal deficit, as did 4 special category states; in FY12, this rose to 10 non-special category states and 8 special category ones. In FY13, this is budgeted to fall to 8 non-special category states and 2 special category ones.
While theres little doubt the buoyancy of central taxes has played a big role in state finances looking better, the states have also upped their game. From 5.1% of GDP in the 1990-98 period, the own-tax-revenue of states rose to 6% in FY11 and is projected to rise to 6.3% in FY13. In contrast, the states share of central taxes rose from an average of 2.5% of GDP in the 1990-98 period to 2.9% in FY 11 and is budgeted to rise to 3% in FY13. If you add all transfers from the Centre, including the grants-in-aid, these rose from 4.5% of GDP in the 1990-98 period to 5% in FY11 and will likely rise to 5.6% in FY13. All revenues of the states, which includes non-tax revenues as well, rose from 6.8% of GDP to 7.2% and 7.5% during this period. In other words, the share of funds being generated through state budgets has risen significantly. So even if there is a shortfall in central taxes in the current yearR50,000 crore is the figure reckonedthis may not hit the states too badly. A R50,000 crore shortfall means central transfers will fall by around R15,000 crore, so state fiscal deficits will rise from the projected 2.1% of GDP to around 2.25%, a figure similar to that in FY12assuming state collections and expenditure remain on track.
None of this suggests the states are out of the woods since petroleum-driven buoyancy wont last forever and costs on electricity tariffs will prove a big burden unless they are passed onin FY12, power expenditure was a fifth higher than projected (R7,640 crore) and while FY13 has budgeted a 11% hike, this is also likely to be exceeded. In any case, interest costs on SEB debt taken over by states will also add up. The short point, however, is that states have, by and large, been fiscally responsible.