Stately presence

Mumbai, Dec. 27: An analysis of state government budgets for 2005-06 shows that there has been a marked improvement in the fiscal position of state governments in recent years in key deficit indicators, a Reserve Bank publication said.

The publication, however, says if state governments are serious about making fiscal consolidation durable and sustainable, there should be adequate investments in economic infrastructure and expenditure on social sectors.

“The states would be required to incur higher outlays on the provision on these sectors. Therefore, a desirable path to fiscal correction lies through fiscal empowerment by expanding the scope and size of revenue flows into budget. The state governments’ strategy of augmenting tax collection through inter alia introduction of new taxes and improvement in tax administration needs to be continued with greater vigour. Moreover, the state governments may go for a comprehensive review of their tax system to minimise transaction costs and rationalise tax structure, which would help in augmenting tax revenues’’, the publication titled State Finances: A Study of Budgets said.

The publication provides data on both consolidated and disaggregated levels based on the state budgets for 2006-07.

In 2005-06, gross fiscal deficit and revenue deficit, as ratios to gross domestic product (GDP), declined to 3.2 per cent and 0.5 per cent respectively. Such a correction came with rising revenue receipts, the publication added.

Moreover, the revised estimates of 2005-06 pointed out that the fiscal performance of state governments improved compared with budget estimates.

As a result of the decline in the revenue deficit by 0.4 percentage points in 2006-07, the gross fiscal deficit is budgeted to decline by the same extent to 2.8 per cent of GDP.

However, the RBI said the improvement in consolidated fiscal position of the state governments during 2006-07 notwithstanding, there are wide variations across the states.

The publication suggested that the fiscally weak states might consider initiating measures to catch up with the sound ones.

The study lauded the enactment of fiscal responsibility legislation by a majority of states that has ushered in a rule-based fiscal policy framework at the state level.