The Hindu Business Line : States' fiscal health has improved: RBI study

There has been a marked improvement in the fiscal position of state governments in last two years, mainly due to increase in revenue from taxes, said the Reserve Bank of India in a study released on Wednesday.

According to the RBI, in 2005-06, gross fiscal deficit of states as proportion of Gross Domestic Product declined to 3.2 per cent and revenue deficit to GDP to 0.5 per cent.

This is mainly because, the revenue receipts as a ratio to GDP increased by one per cent over the previous year. States' own tax receipts rose by 0.3 per cent.

The revised estimates of 2005-06 showed a decline in the revenue deficit by more than 30 per cent as compared to budget estimates. However, there was three per cent rise in gross fiscal deficit due to 10.8 per cent increase in capital outlay.

The revenue deficit is estimated to decline by 0.4 percentage points in 2006-07, over 2005-06 revised estimates. Consequent to this, the gross fiscal deficit is budgeted to decline by the same extent to 2.8 per cent of GDP.

Primary reason

According to the study, revenue enhancement would be the primary reason for fiscal correction in the revenue account during 2006-07. The higher grants coupled with the incentives provided by the Twelfth Finance Commission towards restructuring of state finances have helped the States.

The RBI report also says that there are wide variations across the states. Fiscally weak states should consider taking measures to catch up with the fiscally sound states, the report suggests.

For instance, Tamil Nadu has shown a gradual decrease in expenditure as percentage of revenue from 49.5 per cent in 2004-05, to 47.6 per cent in 2005-06 and 46.5 in 2006-07 (budget estimates).

But in the case of Bihar, it has increased from 193.4 per cent in 2004-05, to 200 per cent in 2005-06 to an estimated 197.7 per cent in 2006-07.

Social sector spending

However, the study has warned that the level of social sector expenditure by States has important implications for the level of human development and long-term prospects of the economy.

"Expenditure on basic social services within social sector expenditure and the non-salary component of the social sector expenditure presumes importance in order to have greater impact on human development," the report said.

The report also said that, going ahead, there could be increases in expenditures such as repayment obligations, deferred expenditures and higher wage bill following the recommendations of the Sixth Pay Commission. Therefore, States need to be cautious on decisions relating to salary levels and balance it with their fiscal capacity, employee strength, size of population and the required complementary expenditure for productive employment.

Furthermore, State governments' strategy of augmenting tax mobilisation through improvement in tax administration and recovery of tax arrears needs to be continued with greater vigour, said the report.

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