Buoyant tax collections in 2008-09 have not only helped the Centre to improve its fiscal situation, but states too have done remarkably well in reducing their fiscal deficit. The gross fiscal deficit of states for 2007-08 is expected to go down to 1.2% of the gross domestic production (GDP) according to initial calculations of the government.
This is significantly better than the revised estimates of states? GFD for last fiscal, which was pegged at 2.27% of the GDP.
While initial trends are based primarily on simple revenue and expenditure calculations, Union finance ministry sources said the GDF is expected to be at about 1.5% of the GDP, down by a massive Rs 50,000 crore, even when the actual numbers come in by the end of the month.
The improvement in the deficit is mainly because of the economic robustness, which led to higher tax revenue for states. ??State level taxes have registered a huge growth in 2007-08,?? a finance ministry official said. Meanwhile, the Centre, which also was able to transfer a much more taxes to, states due to its higher collections.
The states share of taxes and duties from the Centre, as defined by the Twelfth Finance Commission, rose to Rs 1,51,837 crore according to the RE for 2007-08. This is much higher than what was promised in the BE of Rs 1,42,450 crore for last fiscal. Similarly collections of value added tax by states rose by over 20% during last fiscal.
Meanwhile, states have also been able to significantly tighten their purse strings- a move that has helped bring down their fiscal deficit.
??The lower deficit is equally because of controlled expenditure by states,?? a Union finance ministry said.
And surprisingly, it is the so-called ??bimaru?? or financially ailing states of Orissa, Madhya Pradesh, Rajasthan, Bihar and Uttar Pradesh that have done exceedingly well in controlling expenditure and increasing revenue collections. Other states like Haryana, Maharashtra and Tamil Nadu were also able to improved their fiscal position in 2007-08.
However, analysts point out that the combined fiscal deficit situation of states may not improve tremendously in 2008-09, until the Fiscal Responsibility and Budget Management Act is adopted by all of them. At present states of Punjab, Kerala and West Bengal are outside its ambit. Not surprisingly the three states continue to have a situation of revenue deficit at a time when most others are revenue surplus.
Meanwhile, the additional expenditure by the Centre on off Budget items such as the farm loan waiver, implementing the Sixth Pay Commission?s recommendations and the fertiliser and oil bonds are also expected to turn into challenges for the states as they try to further reduce their deficit. DK Srivastava, director Madras School of economic said, ??While states may well be able to consolidate their GDF at below 3% by end of the fiscal, there is a huge risk element from the Centre.??
Central transfer of taxes to states in 2008-09 may actually lessen due to the lesser tax collections and also capital expenditure by states may rise as they will have to implement salary hikes and there are also expectations of an interest rate hike, he pointed out.