State govt budgets show better fiscal health: RBI

After witnessing pressure on fiscal health for two years, state governments budgeted for higher growth in tax revenues and resumption of fiscal consolidation in 2010-11, according to a Reserve Bank of India study.

Yet, though state budgets showed steps for bettering revenue, there are concerns on the quality of fiscal adjustments, due to decline in key expenditure ratios, it said.

The states had stepped up spending in 2008-09 and 2009-10 to fight the economic slowing in the wake of the global financial crisis. Their salary bills also swelled, due to implementation of the VI Pay Commission recommendations.

RBI, in its study, said: “States need to amend their Fiscal Responsibility and Budget Management Acts and work out a fiscal reform path...The emerging pattern of expenditure shows that as a ratio to GSDP (gross state domestic product), development expenditure, capital outlay and social sector expenditure are budgeted to be lower in many states.”

In 2010-11, most states budgeted a revenue surplus or a lower revenue deficit compared with their estimates for 2009-10, indicating they were on the path of fiscal consolidation, the study said.

The gross fiscal deficit of states is expected to decline to 2.5 per cent of GDP in 2010-11 from the revised estimate of 3.3 per cent for 2009-10. The improvement was broad-based, across the states.

As many as 22 states budgeted a lower gross fiscal deficit to GDP ratio for 2010-11, the study said. Of the 17 non-special category states, 11 budgeted a lower fiscal deficit to GDP ratio, while all special category states budgeted lower ratios.

The study said states needed to put in place an effective forecasting and monitoring mechanism for their cash flows and must adopt a need-based approach to market borrowings.