Rating agency Crisil has released a report stating that the state governments' key fiscal indicators-revenue deficit and gross fiscal deficit-will start deteriorating from 2009, after a four-year period of an improving trajectory.

The improvement in the fiscal profile of the state governments is reflected in India's 28 states, reporting an aggregate revenue surplus of Rs 225 billion in 2007-08 (April 1 to March 31), from a deficit of Rs 634 billion in 2003-04. However, this is bound to change as the growth in State Governments' own taxes revenues is expected to slow down, as well as devolution of taxes from the Centre.

The adverse effect of lower revenue growth will be accentuated by higher development and non-development expenditure.

Ms Roopa Kudva, Managing Director and CEO, Crisil, stated, "A shortfall of even 4 per cent in aggregate budgeted revenues for 2008-09 can wipe out the State Governments' entire revenue surplus and push them back into revenue deficits. While the impact will begin to be felt in 2008-09, the full effect of these trends will manifest in
2009-10 and thereafter. Crisil expects that many States will borrow beyond the Fiscal Responsibility and Budget Management (FRBM) Act targets, resulting in higher debt levels."

Revenue from VAT, contributing 42 percent of tax receipts, is expected to slow down because of slower economic growth and deceleration in consumption demand.

Growth in the state excise revenue is expected to decelerate because of the decline in industrial growth; excise contributes 8 per cent of tax receipts.

Revenue from stamp duty and registration charges, comprising 9 per cent of states' revenues, will suffer from the real estate slowdown, which has affected both the volume and the value of property transactions. The slowdown in this sector would also reduce government revenue from sale and lease of land. Finally, slower growth in the Centre's income tax and excise duty collections will affect the devolution of central taxes, which contribute 31 per cent of states' revenue receipts.