''The revenue deficit will increase due to higher devolution in the form of an increase in the states' share in central taxes, a rise in grants-in-aid to states and other relief measures as recommended by the commission,'' the Reserve Bank of India said in its monthly bulletin for May.
Two significant developments have put considerable strain on the realisation of Fiscal Resonsibility and Budget Management targets for 2005-06 in respect of revenue deficit and gross fiscal deficit, it said.
The first development relates to discontinuance of divestment proceeds to finance budgetary expenditure.
The second major challenge faced by the central government in fiscal consolidation endeavour was to absorb fiscal impact to the tune of 0.75 per cent of GDP in revenue deficit due to higher devolution to states as a result of TFC report.
The Union Budget 2005-06 proposed to meet this challenge as it is expected to improve the fiscal position of the general government sector and pave the way for cooperative federalism, the report added.
The Centre has also made a provision of Rs 5,000 crore (Rs 50 billion) as compensation to the states on account of any possible revenue loss due to VAT, the report said.
Against this backdrop, while the Budget conceded difficulty in adhering to the FRBM path during 2005-06, it is committed to resume the process of fiscal correction with effect from 2006-07 and achieve the FRBM goals by 2008-09, RBI said.
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