States must join in fiscal consolidation

ECONOMIC SURVEY 2003-04/ STATE OF THE FISC

The government yesterday said that fiscal consolidation would be difficult to achieve without the active involvement of states. It sought greater involvement of all states to strengthen the growth momentum with macro-economic stability.

While the Centre has initiated steps through the Fiscal Responsibility and Budget Management Act and reduced its fiscal deficit to 4.4 per cent in 2003-04, the financial position of states has deteriorated.

In fact, only five states "" Karnataka, Kerala, Punjab, Tamil Nadu and Uttar Pradesh "" have enacted legislations to strengthen the institutional backing for fiscal reforms.

States' gross fiscal deficit climbed from 3.3 per cent in 1990-91 to 4.7 per cent in the Revised Estimate for 2002-03. In the Budget Estimate for 2003-04, the gross fiscal deficit for states is projected at Rs 116,175 crore or 4.2 per cent of the GDP.

The deterioration in the finances of state governments has been sharper than that of the Central government with all major indicators worsening, the Survey said.

The deterioration was attributed to the growing interest burden, pension liabilities, administrative expenses, losses of state public sector companies and inappropriate user charges with deceleration in Central transfers compounding the problem.

The total liability of the states was estimated at Rs 791,400 crore in the Budget Estimates for 2003-04, 15 per higher than the revised estimates for 2002-03.

Their total liabilities in 2003-04 was estimated at 28.7 per cent of the gross domestic product compared to 27.9 per cent in the previous fiscal.

The Survey said internal debt and loans from the Centre added to the woes of the states. Loans from the Centre accounted for 31.8 per cent of their outstanding liabilities, while internal debt was estimated at 52.6 per cent of the outstanding liabilities, according to the Budget Estimates for 2003-04.

The Centre's debt swap plan, initiated two years ago, has helped states to reduce their interest burden by retiring high cost debt over 13 per cent.

In the last two year, states have retired Rs 60,000 crore. An estimate by the finance ministry says that once the Rs 100,000 crore debt swap plan is completed, states would save Rs 81,000 crore through reduced interest payments over the remaining maturity of their high cost debt.