The Reserve Bank of India has painted a rosy picture of the states' economic situation and said their gross fiscal deficit is expected to fall to 2.8 per cent of gross domestic product by March 2007 from 3.2 per cent in 2005-06.
The revenue deficit is also expected to be nearly wiped out by March compared with 0.5 per cent of GDP in 2005-06. "As a consequence of decline in the revenue deficit by 0.4 percentage points in 2006-07, the gross fiscal deficit is budgeted to decline by the same extent to 2.8 per cent of GDP," it said.
The higher grants from the government, deceleration in revenue expenditure and implementation of a value-added tax would help the states bring down deficits further, the RBI said in its study of state government finances, based on their budgets for 2006-07.
It also asked the state governments to study the likely impact of the Sixth Pay Commission recommendations on their financial health before taking any decision on salary levels.
Any decision to hike salaries should be balanced with fiscal capacity (capability to pay), employee strength and population and the expenditure that they have to incur for productive employment.
As experienced with the earlier Pay Commissions, the State Governments have, by and large, followed the Central Pay Commission award to improve the pay structure of their employees. The states finances deteriorated in the latter part of 1990s after states adopted the recommendations of the Fifth Pay Commission, the RBI said.
The RBI said despite the improvement in the consolidated fiscal position in the recent years, there were wide variations in fiscal performance across states.
Many states are enacting fiscal responsibility laws to catch up with financially sound states. However, the RBI warned that such fiscal correction should be realistic, and not at the cost of capital outlays and expenditure on social sectors.
The RBI said that the states had the challenging task of continuing and sustaining fiscal correction, which would eventually translate into durable fiscal consolidation. It also suggested that the fiscally weak states, could consider initiating measures to catch up with the fiscally sound states.
While lauding the enactment of fiscal responsibility legislation, the RBI suggests that bulk of the responsibilities pertaining to expenditure on social sectors is placed in the domain of state governments and improvement in quality and delivery of social sectors may help in raising cost recovery in respect of these services.
