The Hindu Business Line : States likely to see slippages in revenue deficit targets

Few States had anticipated this steep increase in rates during the last few weeks. Interest and debt servicing costs consume almost 15 per cent of States' revenue receipts.

But sources said that this estimate was made on the assumption that costs on market borrowing would not exceed 7 per cent during the current fiscal. But these rates are now closer to 9 per cent. In fact, expectations are that these rates would move above 9 per cent.

In addition to market borrowings, States also borrow from financial institutions such as the National Bank for Agricultural and Rural Development , public sector insurance companies, HUDCO and the Life Insurance Corporation of India.

All these institutions have increased their lending rates or are in the process of doing so.

INTEREST COSTS

Consequently, the cumulative impact will be on the interest costs of each of the States. In States such as Karnataka, the impact is likely to push up the interest costs to above 18 per cent of the revenue receipts. In some of the weaker States, the impact is likely to push expenditure above 20 per cent, sources said.

This was despite the fact that most of them have already effected debt swaps with the Centre - refinancing borrowings from the Centre, through market borrowings and small savings schemes - thereby bring down their interest expenditure. Some of these gains achieved through these schemes are likely to be partly reversed, the officials said.

INFLATIONARY IMPACT

Besides, the sources said, the inflationary impact is also likely to push up establishment and pension expenditure. This was because most States would face an increase in dearness allowance in both wages and pension. In fact, most States had hoped to contain this component of expenditure this year.

Wages comprise almost 35 per cent of the revenue receipts. Pensions about 12 per cent, the sources said. Though States have been attempting to migrate from the defined benefit to the defined contribution scheme, the advantages were unlikely to be felt in the near future.

Moreover, all States were also under pressure to reduce sales tax or switch over from the current ad valorem methods of taxation to an absolute figure. But, the sources said, given the revenue pressures, States are reluctant to comply with the demands. This is because the hike in fuel prices have benefited them in revenue mop up efforts.

There are also fears that if the States yield to this pressure they would face a slippage in revenue deficits.

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