John Samuel Raja D: States' fiscal situation improves, but for how long?

The financial position of states has improved significantly in the last four years as seen from the sharp fall in fiscal deficit. The states are likely to end this fiscal, ending March 2009, with a revenue surplus. Three factors contributed to the overall improvement of the states’ finances. The first was the increased transfer of resources from the Centre because of the 12th Finance Commission. Receipts from the Centre, in the form of share in central taxes and grants, now account for 44 per cent of the total revenue of states as against 37 per cent in 2004-05. Second, buoyant economic growth has resulted in nearly doubling of the states’ own tax collections.

However, as a percentage of total revenue, the states’ own tax collections have dropped as transfer of money from the Centre grew at a much faster pace. The third reason is the debt-swap arrangement with the Centre to reduce the cost of debt servicing and retiring high-cost borrowings. The improvement on the fiscal front had a healthy impact on developmental expenditure, an important parameter as many social expenditure heads are state subjects. From under 52 per cent of the states’ total expenditure in 2004-05, developmental expenditure now accounted for more than 62 per cent in 2007-08. The key question now is whether the economic downturn combined with increased expenditure, mainly on account of implementing the Sixth Pay Commission award, would wipe out the gains made in the last four years.