Gross fiscal deficit of states set to turn 3.2% of GDP

Written by fe Bureaus | Mumbai | Updated: Feb 24 2010, 05:26am hrs
The gross fiscal deficit of state governments is budgeted to increase to 3.2% of GDP in 2009-10 (Budget estimates), compared with 2.6% of GDP in 2008-09 (revised estimates). Revenue account turned from a surplus of 0.2% in 2008-09 (RE) to a deficit of 0.5% of GDP in 2009-10 (BE), according to a study State Finances: A Study of Budgets of 2009-10, released by the Reserve Bank of India (RBI).

The study also noted that state-wise, revenue accounts of four statesWest Bengal, Punjab, Kerala, and Rajasthanrecorded revenue deficits during 2008-09 (RE). Jharkhand turned from a revenue deficit to a revenue surplus state. In 2009-10 (BE), 10 states are expected to turn revenue deficit from a surplus status in the previous year. Overall, the revenue account is expected to be adversely impacted in the case of 23 states during 2009-10 (BE), the study noted.

The debt-GDP ratio of state governments came down to 26.2% in 2008-09 (RE) from the peak level of 32.8%, at the end of March, 2004. However, outstanding debt is budgeted to increase marginally to 26.5% of GDP by end-March 2010. The XII Finance Commission had recommended that states achieve a debt-GDP ratio of 30.8% till the end of March 2010.

Compared to the XII Finance Commission target of interest payment to revenue receipts (IP-RR) ratio of 15% to be achieved by 2009-10, the combined IP-RR ratio of the states declined from 26% in 2003-04 to 14.4% in 2008-09 (RE). The IP-RR ratio is budgeted to rise marginally to 14.5% in 2009-10.

The study highlights that the fiscal correction and consolidation, witnessed in state finances in the recent past, is likely to have a setback in 2008-09 (RE) due to the economic slowdown and the accompanying moderation in the pace of revenue growth.

The study also emphasises that states need to successfully manage the transition with regard to the implementation of award of the Sixth Central/States Pay Own Commission.

In addition, there are certain structural issues that continue to remain important for state finance. These include quality of expenditure and surplus in cash balances of the state governments. With experience gathered through their FRLs, states need to plan the next round of reforms and resume the process of fiscal correction and consolidation at the earliest.