The article on 'Finances of State Governments - 1998-99 has been published as a supplement to the Reserve Bank of India Bulletin, February 1999.

An analysis of the State budgets for 1998-99 revealed that finances of State Governments have recorded a further deterioration in 1998-99 despite efforts made by some States for undertaking fiscal reforms. The Fiscal deterioration could be gauged from the rise in almost all the major deficit indicators. The aggregate revenue deficit for all States for 1998-99 is budgeted at Rs.26,439 crore or 1.6 per cent of Gross Domestic Product (GDP) which is significantly higher than the previous year level of Rs.19,672 crore (1.4 per cent of GDP). The gross fiscal deficit (GFD ) is projected to increase by 17.5 per cent to Rs. 59,776 crore (3.7 per cent of GDP). The GFD would be financed to the extent of 48.1 per cent through loans from the Centre and the balance 51.9 per cent through States' own capital receipts. The sharp deterioration in States' revenue account has occurred due to a deceleration in receipts and a sharp rise in expenditures. The expenditures of States on the revenue account are estimated to increase by 16.7 per cent in 1998-99 as compared with 16.4 per cent in the previous year. The expenditures on administrative services and miscellaneous general services show a substantial rise of 80.0 per cent and 72.1 per cent, respectively. This rise is primarily on account of revision in pay scales of the employees by several State Governments. On the other hand, the investment outlays of State Governments (developmental capital outlay and loans and advances by the States) would decelerate to 3.0 per cent in 1998-99 from the high growth of 29.0 per cent in 1997-98. The nature of expenditure is also a cause for concern as the non-developmental expenditure in the revenue account is projected to absorb 47.7 per cent of the revenue receipts as against 40.9 per cent in the previous year.

The combined revenue receipts of the twenty-six State Governments are budgeted to rise by 14.7 per cent in 1998-99 as compared with the growth of 15.8 per cent in the previous year. The deceleration in revenue receipts is primarily on account of reduction in grants from the Centre, which are projected to rise by 2.2 per cent in 1998-99, as against 19.6 per cent in the previous year. Many State Governments have been making vigorous efforts for raising funds through mobilisation of small savings because States are given 75 per cent of net small savings collections. Accordingly, accruals of loans against small savings are projected to show a sharp rise of 25.2 per cent, on top of a 47.5 per cent growth in 1997-98.

With a view to enabling the State Governments to raise loans at competitive interest rates through auctions, State Governments have been allowed flexibility in the market borrowings to the extent of 5-35 per cent of the allocated amount. Under this system, the State Governments can also decide the timing and maturity of the market borrowings. The Government of Punjab has exercised the flexibility option and mobilised Rs. 60 crore on January 13, 1998, through auction of a l0-year security at a weighted average yield of 12.39 per cent per annum.

To improve the fiscs, the States have initiated steps to address some long-term issues in revenue mobilisation. PSU reforms and disinvestment and investment inflows for infrastructure development. States have based their fiscal consolidation exercise on four planks, viz., expenditure restructuring, expenditure management, resource augmentation and growth enhancing sectoral policies.

Under Article 280 of the Indian Constitution, the Eleventh Finance Commission (EFC) has been constituted on July 3, 1998 to submit its report covering the five-year period 2000-05. Two of the major terms of reference pertain to (a) the distribution of net proceeds of taxes between the Union and the States and the allocation between States, and (b) the principles governing the grants-in-aid to be given to the States out of the Consolidated fund of India. The EFC has been given the additional mandate to make recommendations pertaining to the augmentation of resources to the Consolidated Fund of States to finance local bodies, viz., Panchayats and Municipalities.

The fiscal health of States has been under severe stress in recent years, as evidenced by the rising deficits and the compression of developmental expenditure. Revenue deficits, which emerged since the mid-eighties, have led to diversion of part of the capital receipts towards current expenditures. Consequently, the internal debt and debt-servicing burden of the State Governments have increased. However, the positive feature has been the continued thrust at fiscal reforms and the unprecedented level of Additional Resource Mobilisation (ARM) measures attempted during the year. The States have had to bear the burden of the Fifth Pay Commission awards, coupled with a general slump in resources. It is, therefore, imperative that States embark more steadfastly than ever before, upon a path of fiscal consolidation, with expenditure restructuring, cuts on non-merit subsidies and increases in user charges as major planks of action