States have reduced their fiscal deficit by bringing down their revenue gap after adopting a rule-based fiscal policy, says a study by the National Institute of Public Finance and Policy (NIPFP).
Since the revenue deficit is the difference between current expenditure and receipts, it means states are primarily focused on narrowing the bridge between non-capital expenditure and revenue.
The study suggested there was a sharp rise in the revenue-to-GDP ratio in the period between 2000-01 and 2007-08.
"There was a time when the revenue deficit was up to 70 per cent of the fiscal deficit. States reined this in when they were given targets on revenue deficits, apart from fiscal deficit targets," said Pinaki Chakraborty, a professor at NIPFP and a co-author of the study, titled 'Fiscal reforms, fiscal rule and development spending: How Indian states have performed'. The other author is Bharatee Bhusana Dash.
According to Reserve Bank data, the aggregate revenue deficit of the states in the 1990-98 period was 0.8 per cent of India's GDP and their gross fiscal deficit was 2.7 per cent of GDP. In 1998-2004, the aggregate revenue deficit went up to 2.5 per cent of GDP and the gross fiscal deficit to 4.1 per cent of GDP. However, according to the budget estimates for 2012-13, the states' gross fiscal deficit was only 2.1 per cent of GDP, which was an aggregate revenue surplus of 0.4 per cent of GDP. The paper surveyed 14 Indian states from 2000-01 to 2009-10. According to the study, there has been an improvement in the aggregate fiscal position of the states but disparities existed in the fiscal performance. The high deficit states seem to have benefited more from fiscal reforms.
Most Indian states had implemented a rule-based fiscal policy, after passing a law to this effect, in 2005-06. There was also an incentive-based fiscal consolidation plan. The 12th Financial Commission had a debt write-off scheme linked to fiscal performance, as an incentive for achieving revenue balance by 2008-09.
The study suggested the states also cut development expenditure to rein in the fiscal deficit.
The study said governments often cut development expenditure such as education and healthcare to meet their deficit targets, as non-development expenditure such as interest payments, wages, salaries and pensions were unavoidable.
