States can now spend more to beat economic downturn in the next financial year also, as they have been allowed to run a fiscal deficit higher by 0.5 percentage points over their targets without losing out on interest and debt relief granted to them by the Centre.

The Union government gives debt and interest relief under the debt consolidation and relief facility to the states, which meet their targets set by Fiscal Responsibility and Budgetary Management acts.

As part of the second stimulus package, states were allowed to deviate from their FRBM targets by 0.5 percentage points to go for a higher fiscal deficit of 3.5 per cent to incur additional capital expenditure to counter the slowdown in the economy of their states.

This freedom was today extended to the next fiscal by the Cabinet, enabling states to go for higher borrowing to meet increase in capital expenditure, particularly in infrastructure as well as employment generation programmes.

"It has been concluded that there is a need to extend the relaxation in fiscal deficit target of the States to 2009-10 in order to spur development of infrastructure and employment generation," home minister P Chidambaram told reporters after the Cabinet meeting.

The decision was taken after acting finance minister Pranab Mukherjee mentioned this in his reply to Interim Budget in parliament.