Outstanding guarantees issued by 17 major state governments -- under articles 292 and 293 of the Constitution -- amounted to Rs 52,631 in 1995-96, up from the Rs 40,159 crore in 1991-92. In its annual report for 1997-98, the Reserve Bank says: "While guarantees or contingent liabilities do not form part of debt as conventionally measured, these have, in the event of default, the potential of exacerbating an apparently sound fiscal system."

Twenty-three states reported a deterioration in their finances, emanating from lower growth in revenue receipts at 14.6 per cent in 1898-99, and a sharp 16.2 per cent increase in the revenue expenditure.

To rein in the fiscal imprudence in states, the central bank has stated thatstates should rationalise the tax structure and harmonise taxes -- moving from sales taxes to value-added taxes (VAT) -- and also explore newer avenues for raising resources like imposing tax on services. Other suggestions include reduction of subsidies in non-merit goods sector and moving over from fixed coupon rate to auction system in borrowing.

There would be a marked increase in the revenue deficit to Rs 24,861 crore or 1.5 per cent of the gross domestic product (GDP) in 1998-99 from the Rs 19,053 crore or 1.3 per cent of the GDP in 1997-98. The widening in revenue deficit will, in turn, cause the gross fiscal deficit to go up sharply to Rs 56,660 crore or 3.5 per cent of the GDP in 1988-99, from the Rs 49,708 crore or 3.5 per cent of the GDP in 1997-98.

The expenditure pattern of states in 1998-99 shows an imbalance in quality. Social expenditure registered a modest 8.5 per cent rise to Rs 76,577 crore with that on economic services increasing by 0.2 per cent.

The Reserve Bank's annual reportstates: "Non-development expenditure, on the other hand, would significantly go up by 34.3 per cent to Rs 93.528 crore in 1998-99. Administrative expenditure and interest payments alone are estimated to absorb 34.1 per cent of the revenue receipts compared with the 28 per cent in 1997-98."

Development capital outlay by states showed a deceleration of Rs 262 crore in 1898-89 compared with a rise of Rs 6,073 crore in the preceding fiscal. Revenue receipts pegged at Rs 1,93,482 crore for 1998-99 show an increase of 14.6 per cent compared with the 16.8 per cent in 1997-98, largely on account of a lower perk in non-tax inflows at 7.5 per cent (14.3 per cent).