Expressing serious concern over the fiscal health of states, the RBI said the aggregate revenue deficit of all the states is expected to rise to Rs 2640.39 crore or 1.6 per cent of GDP from Rs 1960.72 crore or 1.4 per cent of GDP. "The sharp deterioration in states' revenue account has occurred due to a deceleration in receipts and a sharp rise in expenditures," it said.It said revenue expenditure has risen mainly on account of a wage revision for state government employees of several state governments, the central bank said. "The expenditures on administrativeservices and miscellaneous general services show a substantial rise of 80 per cent and 72.1 per cent respectively," the RBI said.

On the other hand, investment outlays - or developmental capital outlays and loans and advances by the states - would decelerate to 3 per cent in 1998/99 from the high growth of 29 per cent in 1997/98, the RBI said. "The nature of expenditure is a cause for concern as the non-developmental expenditure in the revenue account is projected to absorb 47.7 per cent of the revenue receipts as against 40.9 per cent in the previous year," it said. The combined revenue receipts of the 26 state governments are budgeted to rise by 14.7 per cent in 1998/99 against a 15.8 per cent growth in the previous year, the RBI said. Deceleration in revenue receipts is mainly on account of a reduction in grants from the Centre (federal government), which are projected to rise by 2.2 per cent in 1998/99 against 19.6 per cent in the previous year, it said.

The RBI said states have been making vigorousefforts at raising funds through small savings schemes, because they are given 75 per cent of net collections under these heads. "Accruals of loans against small savings are projected to show a sharp rise of 25.2 per cent, on top of a 47.5 per cent growth in 1997/98." The RBI warned that the revenue deficits have led to diversion of part of the capital receipts towards current expenditures, which have led to a rise in the internal debt and servicing burden of the state governments.

It had, therefore, become imperative for state governments to take steps to improve the fiscal situation urgently through expenditure restructuring, cut on non-merit subsidies and increases in user charges as the major action planks, it said.