The overall financial position of the states improved tremendously till 2007-08, but deteriorated thereafter as is evident from the trend in the major deficit indicators of state government. There was a temporary halt in the fiscal consolidation process in 2008-09 and 2009-10 due to the global economic recession. Conditions in the current fiscal were expected to improve and the Budget estimate showed a lower deficit for 2010-11 over 2009-10.
Fiscal consolidation at the state level was achieved on the back of growing own revenues and higher resource transfers from the Centre. States’ own tax revenue for 2010-11 was estimated to go up by 16.7 per cent to Rs 4,26,014 crore. Their share in Central taxes, after revisions, at Rs 2,19,303 crore, is likely to be 33 per cent higher than the actual share for 2009-10.
The financing pattern of the gross fiscal deficit at the state level in recent years has changed significantly, mainly on account of the recommendations of the 12th Finance Commission for phasing out loans from the Centre to the state governments and a decline in collections under national small savings fund which was aimed at providing fixed returns. As a result, market borrowings have emerged as a major financing item for the gross fiscal deficit since 2007-08.
The Economic Survey said the combined deficits of state governments indicated an overall consolidation process in the states. The combined fiscal deficit of the states was estimated at 2.5 per cent of GDP for 2010-11. It noted that a surplus on the revenue account was recorded between 2007-08 and 2008-09. Revenue receipts grew at 17.6 per cent and 10.7 per cent for 2007-08 and 2008-09 respectively.
The consolidated outstanding liabilities of the state governments as at end-March 2000 were placed at Rs 5,09,529 crore which rose sharply to Rs 10,14,000 crore in March 2004 on account of large and persistent revenue deficits resulting in high gross fiscal deficits. The deficit led to a large accumulation of debt and a concomitant increase in the debt service burden during the period. The share of market borrowings has increased sharply over the years and it will comprise almost one-third of the total outstanding liabilities as at end-March 2010.
