The report has estimated the outstanding liability of the states at Rs 4,09,258 crore by March 2000, a 19.9 per cent rise from Rs 3,41,259 crore during March 1999.

In terms of gross domestic product (GDP), it is estimated to reach 20.5 per cent during 1999-2000 as compared with 19.4 per cent in 1998-99.

The growing debt of the states generally reflects the high level at which the aggregate expenditure of the state governments has remained (around 15 per cent of GDP), the sluggishness in own-tax revenues and relatively low return on investments.

The rising expenditure of the state governments has been mainly under the head non-plan revenue expenditure, largely on account of rising wages and salaries, pensions, subsidies and interest payments. During 1998-99 state governments had to bear an additional fiscal burden on account of pay revision for government employees. ``Not only are these expenditures committed, they are also downward sticky,'' says the report.

The states are, therefore, often constrained to choose the softer option of cutbacks in capital outlays, with the result that actual Plan investment often fell short of the orginal Plan outlays. This has affected allocation of adequate resources for education and health sectors, the development of which is the primarily responsbility of states.

On the revenue side, there has been steady deterioration in tax to gross fiscal deficit (GFD) ratio on the one side and lack of buoyancy in non-tax revenue collections on the other. Both the developed and backward states are confronted with the situation of rigid revenue position.

The report suggests that concerted efforts are needed to be put to exploit the full tax potential by timely collections of arrears and curtailing unproductive tax incentives and by strengthening tax administration.

The report points out that notwithstanding the states efforts in the current year at improving the resource level, a matter of concern continues to be the high proportion of the total borrowings requirements which would be used for financing the revenue gap.

The revenue deficit reached 53.8 per cent of the gross fiscal deficit (GFD) in 1998-99. This had led to less use of borrowings for investment purposes as is evinced by the fact that expenditure in capital outlay, which absorbed 49.1 per cent of gross fiscal deficit (GFD) in 1990-91 and 60.4 per cent in 1993-94 is anticipated to dip to 36.8 per cent in 1999-2000. In addition to the high stock of public liabilities, contingent liabilities or guarantees have a bearing on the health of state finances.

A growing trend in guarantees has been witnessed on account of the demand for extending guarantees for infrastructure projects.

The outstanding state governmnet guarantees (17 major states) as ratio to gross domestic product stood at 4.7 per cent at end-March 1999, lower than the level of 6.5 per cent at end March 1992.

However, the nominal stock guarantees witnessed an annual average growth of 11.1 per cent between March 1992-1999.

INSIGHT :
A grim future indeed
The finances of state governments have deteriorated significantly, mainly due to inability to charge the full cost of services provided, a continuous rise in expenditure, and underexploitation of tax potential. The combined revenue deficit of the states in 1998-99 more than doubled. Credit agency Crisil has hinted at a downgrade in states' ratings.
The future implications are serious. From April 1 this year, banks will have to revise risk weight and provisioning requirements for state-government guaranteed debt. States had tried to solve their credit problems through the guarantee route. Now that route too will be substantially narrowed. So credit flow wil be curtailed, and the states will be forced to borrow more at ever increasing rates of interest, adding to the already insupportable burden of their debt.

-- Manas Chakravarty