IMF may consider state finances for determining country status

The International Monetary Fund (IMF) is considering state government finances as one of the major criteria for deciding on the financial status of a country.

If the proposal in this regard is accepted, it will have major implication for India as the state government finances are deteriorating fast.

According to banking sources, the issue has been discussed at various levels with the Reserve Bank of India (RBI) as well as the finance ministry. The Fund is of the view that India being a federal state, state governments have substantial bearing over tax and expenditure policies of the country.

Usually, central government's finances, exchange rate policy are the two major parameters for deciding on funding and rating of a country. In the Indian context, increasing guarantees given to state undertakings for raising finances have been a major concern.

According to sources, while multilateral agencies are eager to fund infrastructure projects here, there is hardly any data available on the end use of these funds in most of the states.

Major weaknesses of state government finances are increases in non-developmental expenditure, particularly the revenue component of the non-developmental expenditure and interest payments as a proportion of revenue receipts.

Structural imbalances in the form of large revenue deficits, rising interest burden, increasing distortions in the pattern of expenditure and very slow growth in non-tax revenues are major problem areas for state finances.

The fiscal situation in the states have been hit hard with the acceptance of the Fifth Pay Commission report, said sources.

As per the data available with the RBI, the collective gross fiscal deficits of all states has gone up from Rs 95,993 crore in 2002-03 to Rs 116,635 crore in 2003-04. Revenue deficit alone accounts for Rs 61,239 crore, up from Rs 59,188 crore in the same period.

The RBI has proposed a Fiscal Responsibility and Budgetary Management Act to rein the growing fiscal deficits of states. Some of the Indian states have accepted the new norms. It has been made mandatory for the state government undertakings to seek the permission of the central government before launching any special purpose vehicle to raise market borrowings.