Reforms must to curb deficit: World Bank

The World Bank has suggested reforms, including early introduction of value-added tax (VAT), check on expenditure and measures to bring about fiscal discipline to eliminate the revenue deficit in states by 2007-08.

"Radical restructuring of state finances is not only necessary for faster development but a concerted effort in expenditure control, revenue augmentation and debt relief is needed," World Bank country director Michael Carter said while releasing a report, 'State Fiscal Reforms in India Progress and Prospects'.

The average revenue deficit of poorer states is estimated at 3.5 per cent of gross state domestic product (GSDP) while it is 2.5 per cent for richer states. The fiscal deficit of poorer states can be halved 3 per cent if the reforms roadmap is followed.

The World Bank warned that higher interest rates could threaten the development prospects and said even a 100 basis point increase could result in resources moving away from productive spending and to debt servicing.

"If the average real growth rate during 2004-08 drops to 5 per cent from the current 6.5 per cent, committed spending as a share of GDP would increase significantly. There would be no fiscal space to protect other recurrent spending including operations and maintenance," it added.

According to the World Bank's estimates, introduction of VAT would raise the revenue earned by states by 0.2 per cent of GSDP annually during 2006-07 and 2007-08.

Other tax reforms like reduction of stamp duties and strengthening professions tax and reforming motor vehicles tax would raise revenues by another 0.2 per cent in 2004-05 and 0.1 per cent in 2005-06.

Taxation of services from 2006 is expected to revenues by another 0.2 per cent in 2007-08. In addition, the multilateral agency proposed widening of the tax base of states by allowing them to tax services and enhance the professional tax limits. It also said that the tax administration should be revamped.

"State governments have significant, if not the main responsibility, for many of the developmental areas "" roads, irrigation, health and education, which the bank is financing. If state finances are not put on a stronger footing, the sustainability of investments cannot be assured and government effectiveness will continue to suffer," Carter said.