RBI releases Study on State Finances : 2008-09

The Reserve Bank of India (RBI) today released State Finances: A Study of Budgets of 2008-09, a publication that provides
data, analysis and assessment of finances of State Governments. The publication presents data at both consolidated and
disaggregated levels based on the State budgets for 2008-09. Statistical tables appended to the publication provide information
on several fiscal parameters as well as detailed State-wise budgetary data covering both revenue and capital accounts.
The Study highlights the noticeable improvement in the consolidated fiscal position of the State Governments evident during the
recent years. The revenue account of States turned around from deficit to surplus during 2006-07 after a gap of two decades.
The revenue surplus position has been proposed to be maintained in the revised estimates (RE) for 2007-08 as well as the
budget estimates (BE) for 2008-09 at 0.5 per cent of GDP. Reflecting the improvement on the revenue account, the ratio of gross
fiscal deficit to GDP was 1.9 per cent in 2006-07 (accounts). The gross fiscal deficit as a ratio to GDP was estimated higher at 2.3
per cent in 2007-08 (RE) on account of higher capital outlay, but is budgeted to decline to 2.1 per cent during 2008-09 though
capital outlay to GDP ratio would be maintained at 2.7 per cent. The State Governments also generated a primary surplus (0.4
per cent of GDP) during 2006-07 (accounts), which is estimated to turn into deficit of 0.1 per cent of GDP in line with increase in
gross fiscal deficit, notwithstanding the increase in interest outgo in 2007-08 (RE) as well as 2008-09 (BE).
According to the Study, several State Governments have already achieved the targets recommended by the Twelfth Finance
Commission (TFC) and targets set under Fiscal Responsibility Legislations (FRL) with regard to elimination of revenue deficit and
reduction in gross fiscal deficit to 3 per cent of Gross State Domestic Product (GSDP). During 2008-09, twenty-five States
presented revenue surplus budgets and seventeen States have budgeted their gross fiscal deficit at less than 3 per cent of
GSDP. The achievement of the TFC targets ahead of the recommended schedule by a number of State Governments reflects
strong growth in tax revenues, both States own and devolution from the Centre, and higher grants-in-aid. The Study notes that
while States have been able to scale up capital outlay, there has been some rationalisation of revenue expenditure during the
FRL period.
The Study points out that the outstanding liabilities of the State Governments, which had reached high levels in the first half of the
current decade on account of large and persistent fiscal imbalances, have shown signs of improvement in the recent past. From
the peak level of 33.2 per cent in 2004, the debt-GDP ratio of State Governments came down to 28.3 per cent in 2007-08 (RE)
and is budgeted at 27.4 per cent in 2008-09. The ratio of interest payments to revenue receipts of the State Governments has
declined from a high level of 26.0 per cent in 2003-04 to 15.1 per cent in 2008-09 (BE).
The Study notes that there exists wide variation in fiscal performance across the State Governments notwithstanding the
noticeable improvement in the consolidated fiscal position in the recent years. According to the Study, State-specific fiscal
conditions including fiscal priority and low fiscal capacity play an important role in designing of expenditure pattern. In the State-
wise section, this Study has introduced additionally an analysis of expenditure parameters on per capita basis. It has been
observed that the correction in the revenue account and the consequent revenue surplus resulted in higher allocation of
expenditure towards development and social sectors in most of the States.
The Study emphasises a number of issues, which continue to be important for State finances, such as sustaining the fiscal
improvement achieved in recent years in the post-FRL period, making the fiscal correction durable through generation of
adequate own revenues, improving the quality of expenditure through expenditure prioritisation as well as efficient service
delivery, reducing the existing level of debt obligations notwithstanding the improvement in recent years, and providing adequate
financial support to the local bodies.
The publication has been prepared in the Division of State and Local Finances (DSLF) of the Department of Economic Analysis
and Policy. Starting with 2001-02, this publication is available at RBI website (www.rbi.org.in). Comments on this publication may
be sent to Director, Division of State and Local Finances, Department of Economic Analysis and Policy, Reserve Bank of India,
Shahid Bhagat Singh Road, Mumbai 400 001. Comments can also be sent via e-mail.