Fiscal discipline helps 24 states wipe out revenue deficit: RBI

Several state governments have turned around wiping out their revenue deficits after a gap of 20 years. An RBI analysis of budgets of 28 state governments indicates that their revenue account turned around from deficit to surplus during 2006-07 (accounts) after a gap of two decades to a surplus of Rs 24,857 crore from a peak deficit of Rs 63,407 crore in 2003-04. With the exception of four states —West Bengal (Rs 8,333 crore), Kerala (Rs 2,638 crore) Punjab (Rs 1,749 crore), and Jharkhand (Rs 1,090 crore in revised estimates) — all states have recorded a revenue surplus. Madhya Pradesh topped the list with a revenue surplus of Rs 3,332 crore. New Delhi, which along with Puducherry is not a part of the 28 states, has recorded an even higher revenue surplus of Rs 7,755 crore. The study attributes the turnaround to voluntary efforts at fiscal correction through enactment of fiscal responsibility legislations (except West Bengal and Sikkim), buoyancy in revenues as well as higher devolution from the Centre on account of higher economic growth. Their gross fiscal deficit (GFD) and revenue surplus as a percentage to GDP are placed at 2.3% and 0.48%, respectively, in the revised estimates of 2007-08. In 2008-09 (budgetary estimates), states budgeted a higher revenue surplus at 0.54% of GDP. The GFD as a ratio to GDP is budgeted to decline to 2.1%. Many states have already achieved the 12th finance commission (TFC) target and targets set under their fiscal responsibility legislation with regard to revenue deficit and GFD in 2007-08 (RE). The impact of Sixth pay commission will differ from state to state depending upon the pace of adoption of recommendations and their implementation. In view of the ongoing fiscal correction and consolidation process, the states may need to base their decisions relating to salary levels after due consideration to their fiscal capacity, employee strength, size of population and the required complementary expenditure for productive employment. Despite improvements on an overall basis, the study has noted that there exists wide variation across the state governments with regard to fiscal performance. While some states have already achieved the TFC targets with regard to several indicators well ahead of the time frame, there are some other states where fiscal correction is slow. The correction in the revenue account and the consequent revenue surplus resulted in higher allocation of expenditure towards development and social sectors in almost all states. Another area that continues to be a cause of concern is the finances of local bodies. The study points that finances of local bodies in both urban and rural areas portray a dismal picture. It has been well documented that the process of devolving funds to the local bodies based on recommendations of the state finance commissions (SFCs) has not yielded the desired outcomes.