The Hindu Business Line : States may end up with fiscal deficit cap of 4%

State governments expect their fiscal deficit cap, along with that of the Centre, to go up to 4 per cent of their gross state domestic product (GSDP).

While the States are bargaining for a fiscal deficit cap of about 5 per cent in their ongoing discussions with the Centre, they may settle for 4 per cent, high-level State Government officials said here.

The talks could, therefore, translate into an elbow room of another 0.5 percentage points in the case of States that have amended their fiscal laws to allow for a cap of 3.5 per cent.

The Karnataka Government — which is yet to amend its Fiscal Responsibility and Budget Management (FRBM) Act to increase its fiscal deficit cap beyond 3 per cent of GSDP — could end up with additional fiscal room of Rs 2,800 crore, or roughly one per cent of its GSDP, officials explained.

This could translate into a major demand for grants towards September to meet the expenditure commitments, they said.

“At present, there is no evidence of fiscal stress. In fact, the last year was atypical, thanks to elections and the slowdown. Karnataka should not have serious problems this year. The Pay Commission disbursals started in 2008-09, easing the burden for the Karnataka Government this time. At the Centre, income-tax revenues have so far been encouraging,” officials explained.

However, if fiscal stress does build up later in 2009-10, in the event of the State’s economy not growing at the expected level of 6 per cent in real terms, expenditures may be pruned across programmes.

“The present State budget will remain valid for the whole year,” officials said. A change in the situation regarding Central transfers will show up in the supplementary demand for grants, but perhaps not in another State budget, they clarified.

Borrowing limits

But States are also pushing for reworking the borrowing limits. States now want the borrowing limits to be linked to their respective debt servicing capacities. Currently, the borrowing capacity is fixed as a percentage of the GSDP.

The flip side of this move was that States with high revenue receipts were likely to benefit. Karnataka, for instance, has an internal tax to GSDP ratio of 11 per cent. The last budget for Karnataka has forecasted tax receipts of Rs 32,000 crore in 2009-10.

However, the high tax estimates made by the States have come under pressure. Industry associations have presented “pre-budget memorandums” to the Government, seeking a review of tax proposals.

But in anticipation of lower tax receipts and reduced share from the Centre, some States have begun demanding for deferral of the deadline for migration to Goods and Services Tax (GST) regime.

The fear was that the GST would further hit tax receipts of States, leading to high revenue deficits. The fears arise out of uncertainty over the amount of compensation payable to States in the wake of a transition to the GST system.

However, Karnataka indicated that it would continue with the liberal tax regime. The officials said that the migration to the GST regime will entitle States to a share in service tax revenues, offsetting the losses arising out of lower rates.