Fitch Ratings says the impact of India's Union Budget 2009-10, presented on July 6 in parliament, will likely be more severe for smaller states' fiscal profiles, than for larger states.
"The impact of a slower growth of devolutions and transfers from central government would be more severe on smaller states, who receive a larger share of their revenues from central government. However, the impact on bigger states with a higher share of their own taxes in their revenue receipts will be less. Furthermore, increased borrowings by states has the potential of leading states into a deficit-debt cycle," says Dr Devendra Kumar Pant, director, Fitch Ratings.
"General economic slowdown and lower revenue buoyancy would have an overall adverse impact on states' fiscal profiles. Growth of aggregate devolution and transfers from central government to states is budgeted to decline to 7.0 per cent in FY10, down from an average growth of 19.9 per cent during FY06-FY08 and 11.2 per cent in FY09 (revised estimate, RE). States receive a sizeable share of their revenue as devolution and transfers from central government," adds Dr Pant.
Indian state government finances have improved markedly since 2000. In India, 28 states and two union territories with legislative assemblies (Delhi and Puducherry) have their own budgets. Furthermore, high economic growth, revenue buoyancy and higher devolutions from central government coupled with fiscal and institutional reforms resulted in improvement in states' fiscal positions.
The states' aggregate revenue account turned into a surplus in FY07 (0.6 per cent of GDP), after a gap of nearly two decades, from a deficit of 2.6 per cent of GDP in FY01. Aggregate revenue balance in FY08 (RE) and FY09 (budget estimate, BE) is also expected to be in surplus.
Fiscal balance too mirrored the pattern of revenue balance and fiscal deficit/GDP improved to 1.9 per cent in FY07 from 4.2 per cent in FY01. Aggregate fiscal deficit in FY08 (RE) and FY09 (BE) is expected to deteriorate marginally from FY07 at 2.3 per cent and 2.1 per cent of GDP respectively.