Link state debt relief to fiscal responsibility

ECONOMIC SURVEY 2004-05/ STATE FINANCES

Growing revenue expenditure and losses of PSUs main causes for the deteriorating fiscal health of states.

The recommendations by the Twelfth Finance Commission to link debt relief for states with fiscal responsibility laws, and the requirement of all but fiscally-weak states to directly borrow from the markets, would be crucial to discipline state finances, the Economic Survey said.

With five states already enacting fiscal responsibility laws and three more planning to do it shortly, state fiscal deficit as a share of the GDP is expected to improve considerably to 3.6 per cent during the current year compared with 5.1 per cent in 2003-04.

The survey held growing revenue expenditure, interest burden, losses of public sector units, inappropriate user charges and falling central transfers to states responsible for the deteriorating fiscal health of states. The fiscal deficit was as low as 3.1 per cent of the GDP in 1990-91, after which it spiraled.

A disturbing trend has been the mounting outstanding liabilities of states, the share of which in GDP is expected to increase from 21.7 per cent in 2002-03 to 29.4 per cent in the current year.

The outstanding guarantees, indicating rising off-Budget borrowings, also increased from 4.4 per cent of the GDP in 1995-96 to 7.5 per cent in 2002-03.

States, however, outscored the Centre in terms of raising resources. The states' share of own tax revenue in the GDP rose from an average 5.4 per cent in 1990-95 to 5.8 per cent in 2003-04. In contrast, the Centre's share declined from 4.9 per cent to 4.1 per cent.