The Twelfth Finance Commission on Monday warned that rising fiscal deficit of the Centre and the states at over 10 per cent of GDP in 2002-03 may have an "adverse" impact on debt, developmental expenditure and growth.

"Adverse impact of a large fiscal deficit on the economy should not be under-estimated. Fiscal deficits of the Centre and state governments need to be brought down in a calibrated way by augmenting revenues and pruning expenditures," TFC chairman, C Rangarajan, said at a conference in New Delhi.

Speaking on 'Issues before the TFC' orgainsed by National Institute of Public Finance and Policy, he said the combined fiscal deficit was more than 10 per cent in 2002-03, compared to 8.8 per cent in late 1980s.

While the Tenth Plan has envisaged a fiscal deficit of 6.8 per cent of GDP during 2002-07, the Eleventh Finance Commission had pegged it at 6.5 per cent as the "desirable target" to be achieved by 2004-05, he said.

Burgeoning fiscal deficit may lead to rise in debt, increasing interest payments, fall in developmental expenditure and the consequent impact on growth rate, he said.

Referring to Eleventh Finance Commission's target of 7-7.5 per cent growth in the last three fiscal years, Rangarajan said the country could achieve only 4.0, 5.6 and 4.4 per cent GDP growth respectively.

Referring to the revenue deficit of the Centre and the states, which increased to over 7.0 per cent in 2001-02 from 6.3 per cent in 1999-2000 and 3.6 per cent in 1994-95, he said, "With current trends indicating continued deterioration, the situation is likely to further worsen by 2004-05."

Tax-GDP ratio fell by 1.9 per cent in the last 15 years from 16 per cent in 1986-87, and was estimated to be 14 per cent in 2003-04, Rangarajan said.

"The decline in Tax-GDP ratio was due to fall in revenues from Indirect Taxes-GDP ratio by 2.8 per cent, which could only partially be compensated by the rise of 0.9 per cent in direct Tax-GDP ratio," he said.

The combined revenue spending of the Centre and states increased by 1.43 per cent to 22.9 per cent of GDP during 1998-2001, he said referring to the surge in interest and pension payments since the late 1980s.

For fiscal sustainability, Rangarajan said, "It is required that a rise in fiscal deficit is matched by a rise in the capacity to service the increased debt."

Instead of falling, the debt-GDP ratio increased to 76 per cent in 2002-03 from 65 per cent in 1999-2000.

The TFC chairman said that about 70 per cent of the borrowings of the government were spent on areas other than capital assets, which resulted in lower returns.