Of the four states that came out of the election fever this weekend, the first priority of the new governments will be to petition the central government for radically stronger financial support. All of them, without exception, have whittled down the double shot of fiscal largesse that was built in the award of the 12th Finance Commission and the introduction of the value-added tax (VAT). While Tamil Nadu is not as fiscally challenged as West Bengal, Assam or Kerala, all of them have built up fiscal pressures that have got even more aggravated by the final year of promises, but not backed by a careful reading of their financial strength.

Among them, Tamil Nadu and Assam had also committed themselves to a fiscal reform calendar, but that constraint has not been accepted by West Bengal or Kerala. At first analysis, the stress on the fiscal in these states does not seem apparent except in the case of West Bengal. But it begins to look worrisome when one examines the disaggregated numbers for each state, namely the revenue deficit, the fiscal deficit and the market borrowing of each state.

In the Indian federal set-up, the states depend disproportionately on the level of central transfers. Compared to those transfers, their ability to generate resources from their own tax base has been limited. However, that picture changed for the better in 2005-06, which saw the states adopt VAT and almost simultaneously the commitment to fiscal responsibility. But, as we shall see later, that benefit has begun to taper off, as the expenditure bucket of the states expanded fast.

The other spoiler in the story was the slowdown in the Indian economy in 2008-09 that perceptibly worsened the fiscal position of the states.

So, in the first stage, in 2005-06, the four states being examined here began to reap the first rewards of lower revenue deficit. They were also helped by the fact that the 12th Finance Commission tied a reward to each state government to the number of milestones they achieved in the fiscal responsibility roadmap. The first set of numbers for revenue deficit for each state improved rather sharply since 2005-06.

But from thereon the picture gets muddied. The states, at one level, were attempting to clean up their revenue deficit. But the fiscal deficit of states like Assam and West Bengal was doing no catch up. This was because there was no incentive to reduce this deficit?the fiscal roadmap used the revenue deficit as an indicator, for good reason. The states, therefore, borrowed heavily and used the sum to run up supposedly good capital expenditure. This has often meant spending on costly projects without careful appraisal.

In this context, let?s first examine Tamil Nadu, which has the strongest fiscal position among the four. Since 2005-06, the state has slipped from a surplus in its revenue account (-1.1%) as a percentage of the gross state domestic product (GSDP) to 0.8% by 2010-11 (budget estimates). Interestingly, in the same period, its market borrowing has gyrated wildly.

In 2008-09, it raised R9,598 crore from the market, which went up to R12,599 crore in the next fiscal, a rise of over 31%. Keeping in consideration the rise in market borrowing, the Planning Commission raised its gross allocation to R13,569 crore in 2010-11. But for this fiscal it has raised R9,981 crore only from the market (till March 23, 2011). Obviously, the two do not square up, because if there is a uniform improvement in the state report card, the borrowing should not be so out of whack. The primary deficit, which measures how much a state is adding to its deficit net of interest payments, bears out this story. From a negative 0.8% in the initial year, the number has worsened to positive 2% by the terminal year. As a result, from 2005-06 the state has pushed up its fiscal deficit as a percentage of the state domestic product to 3.7%, from an admirable 1.2% in 2005-06. Essentially, the experience shows the state has not been able to run its fiscal house in order. This is very new territory for Tamil Nadu, which till pretty recently had a very well managed fisc.

In this scenario, the new government in Fort St George is almost certain to ask the Centre for more support as its ability to extract more bang from the growth story in the state has got almost totally eroded.

Now take Assam. This state has seen one of the most startling deteriorations in its fiscal story at a time when other states, even among the special category states, have had a better run. Assam had a very robust positive revenue balance in 2005-06, helped by higher tax devolution and transfers from the Centre. But again, as the chart shows, this booty evaporated by 2010-11 to reach a very disappointing 6.1% of the GSDP. In fact, the state has been able to borrow only R800 crore in the last fiscal from the markets against the R3,361 crore of gross allocation allotted to it. Its fiscal deficit was a humongous 11.5% in 2009-10, and though the budget estimates for the last fiscal pegged it lower at 9.5%, the new government will most likely show a similar result.

But since RBI classifies all state government bonds as eligible for special liquidity ratio status (SLR), none of them, irrespective of what they do to the fisc, will be called upon to account for it. The SLR grade ensures that the banking system will offer well-managed states like Chhattisgarh or Gujarat the same spread as is offered to West Bengal or Assam.

To return to the main story, despite all the caveats of the asymmetric balance in revenue raising power of the Centre and the states, there is a clear pattern emerging now. Some of the states are consistently among the poster boys of improved fiscal management while others, equally consistently, are not.

Between Kerala and West Bengal, the former has done much better on internal housekeeping. As the numbers show since 2005-06, its revenue deficit has improved from 2.2% as a percentage of the GSDP to 1.5% by 2010-11 (budget estimates). At the same time, West Bengal had a 3% revenue deficit, that has only expanded to 3.4% as per its budget estimates for 2010-11. In the first 45 days of this fiscal, it has borrowed over R5,200 crore from the market at increasing spread. The borrowing is equal to the total debt raised by Kerala in the last fiscal.

West Bengal is possibly the last state in India to have signed the fiscal responsibility act, in December 2010. This means Mamata Banerjee will be forced into a fiscal straitjacket from the beginning itself. To counter the impact, it?s certain she will have to petition the Centre for a special package.

subhomoy.bhattacharjee@expressindia.com