States' combined fiscal deficit doubles over 3 years

States’ borrowing limits were enhanced to counter the impact of the global economic crisis in 2009-10.

The Economic Survey indicated the combined fiscal deficit of states would touch 3.2 per cent of Gross Domestic Product in 2009-10, the year their borrowing limits were enhanced to counter the impact of the global economic crisis.

It emphasised the need to bring in the much-awaited goods and services tax (GST), to enable an increase of revenues for the states. It also suggested movement on fiscal consolidation, including cuts in spending to bring these in line with revenue.

Also recommended is a review of the public distribution system (PDS), with the subsidy to be given directly the consumer, who could then buy the intended product directly from the normal market.

The combined fiscal deficit of the states rose from 1.4 per cent of GDP in 2007-08 and 2.6 per cent in 2008-09. With the enhancement of the borrowing limits of the state by 100 basis points, the deficit is expected to rise to 3.2 per cent of GDP this year.

The limit had been raised to enable each state to borrow up to four per cent of its gross state domestic product (GSDP). The Union government had also revised the fiscal deficit target for states for 2009-10 from 3 per cent to 4 per cent of their respective GSDP. As a result, during the current financial year, the amount raised by state governments aggregated to Rs 105,937.7 crore till December 2009, as compared to Rs 52,842.7 crore raised during the corresponding period last year.

“The introduction of VAT (value added tax) by states resulted in good growth in states’ own tax revenue in the last few years,” the Survey noted. Till December 2009, an amount of Rs 2,558 crore had been released as central compensation for revenue loss on account of VAT. Similarly, about Rs 6,000 crore was released to the states till December 2009 as part of the compensation to phase out central sales tax.