"Excessive counter guarantees by governments to public financial sector, especially to enterprises which are not viable, could raise concern due to its potential adverse implications for the financial sector balance," the RBI annual report said. The outstanding state governments guarantees shot up from Rs 40,159 crore in March 1992 to Rs 79,625 crore to September 1998. The recent technical committee on state government guarantees has recommended setting up a limit on guarantees and constituting a contingency fund for guarantees to meet any eventual obligations.

The states are facing severe fiscal stress as evidenced by the deterioration of major deficitindicators - gross fiscal deficit, revenue deficit and conventional deficit. This was revealed in the RBI annual report following an analysis of the consolidated budgeted data for 26 state governments.

"The finances of the state governments have been affected by further pressures on the revenue account, with the growth in expenditure outpacing that of revenue receipts," the apex bank report said, adding that the revenue deficit of states for 1998-99 more than doubled to Rs 40,539 crore from Rs 16,372 crore in 1997-98.

"The revenue deficit is estimated to increase to Rs 43,236 crore even after taking into account additional resource mobilisation (ARM) of Rs 2,946 crore by eleven states," RBI said, adding that this reflected the adverse affect that the deceleration in growth of revenue from Central taxes had on the devolution of resources from the Centre to the States. "The additional expenditure on account of pay revision of State Government employees and interest payments contributed in a major way to theworsening of the revenue account and to the rise in the overall borrowing requirements," the report said and added, "as a result the combined GFD of the States is budgeted at Rs 80,223 crore for 1999-2000, which is a steep four per cent of the GDP."

The preemption of borrowed funds on current expenditures has caused a sharp decline in States' capital outlay and the proportion of GFD being utilised on capital outlay has come down to 34.5 per cent in 1998-99 from 51.5 per cent in 1997-98. "Many state governments have taken initiatives to raise tax and non-tax revenues to stem the persistent deterioration in the revenue account. Nonetheless, the revenue deficit is expected to widen to Rs 43,236 crore in 1999-2000 as compared to Rs 40,539 in the previous year. This is on account of a steep rise expected in the States' revenue expenditure -particularly the non-developmental revenue expenditure, which is expected to rise by 24.1 per cent," the annual report said.

The apex bank report cautioned that theincreasing burden of interest payments will weigh very heavily on State finances.