The aggregate revenue deficits of all the states is expected to rise to Rs 26,439 crore or 1.6 per cent of GDP from Rs 19,672 crore (1.4 per cent of GDP) during the financial year, RBI said in its supplement on "Finances of state governments: 1998-99" to the February 1999 bulletin, released on Wednesday.

The combined revenue receipts of the 26 state governments are budgeted to rise by 14.7 per cent in 1998-99 against a 15.8 per cent growth in the previous year.

Deceleration in revenue receipts is mainly on account of deduction in grants from the Centre, which are projected to rise by 2.2 per cent in 1998-99 against 19.6 per cent in the previous year, it said.

According to the Reserve Bank, the sharp deterioration in the states' revenue account hasoccured due to deceleration in receipts and a sharp rise in expenditure. The expenditure from the state revenue account is estimated to rise by 16.7 per cent in the current financial year as compared to 16.4 per cent in 1997-98.

"The nature of expenditure is also a cause of concern as the non-developmental expenditure in the revenue account is projected to absorb 47.70 per cent of the revenue receipts as against 40.9 per cent in 1997-98," it said.

"The sharp deterioration in states' revenue account has occurred due to a deceleration in receipts and a sharp rise in expenditures," it said. The revenue deficits, which have become a phenomenon since the mid-80s, have led to diversion of part of the capital receipts towards current expenditures. Consequently, the internal debt and debt-servicing burden of state governments have increased, the supplement noted.

Revenue expenditure has risen mainly on account of a wage revision for state government employees of several governments, the central bank said. "Theexpenditures on administrative services and miscellaneous general services show a substantial rise of 80 per cent and 72.1 per cent respectively."

On the other hand, investment outlays -- or developmental capital outlays and loans and advances by the states -- would decelerate to 3.0 per cent in 1998-99 from the high growth of 29 per cent in 1997-98, RBI said.

RBI said states have been making vigorous efforts at raising funds through small savings schemes, because they are given 75 per cent of net collections under these heads. "Accruals of loans against small savings are projected to show a sharp rise of 25.2 per cent, on top of a 47.5 per cent growth in 1997-98."

RBI warned that the revenue deficits have led to diversion of part of the capital receipts towards current expenditures, which have led to a rise in the internal debt and servicing burden of the state governments.

It had, therefore, become imperative for state governments to take up steps to improve the fiscal situation urgently throughexpenditure restructuring, cut on non-merit subsidies and increases in user charges as the major action planks, it said.