Mumbai: Fitch Ratings has today said that Union Budget 2008-09 proposals would help improve the fiscal position of states at an aggregate level.

"The 17.7 per cent increase in the share of central taxes to states and the 12.0 per cent increase in combined plan and non-plan grants from central government to states in FY09, could serve to improve the financial profiles of at least the weaker states, particularly if their own revenues continue to exhibit buoyancy," says S Nandakumar, director, Fitch Ratings India.

"The buoyancy in VAT collection, consolidation of central loans and debt waivers, and continued growth momentum would result in further improvement in Indian state governments' finances. However, the Sixth Pay Commission has the potential to reverse some of the progress made towards fiscal consolidation," adds Devendra K. Pant, associate director, Fitch Ratings India.

Its budget comment titled, Indian State Governments' Finances and Union Budget 2008-09, Firch says Indian state government finances have improved markedly since 2000. All the 28 states and two union territories with legislative assemblies (Delhi and Puducherry) have their own budgets. Individual state budgets outline their revenue and expenditure priorities.

However, the union budget has always been important for state governments' finances owing to the national reforms and priorities set out by the central government. State governments' economic and reform policies generally revolve around the national economic and reform agenda. The states receive a large share of their revenue from the central government through shares in central taxes and grants; this important link with the Union budget has an impact on state governments' fiscal performance.

The Indian economy is experiencing strong growth momentum; average GDP growth for FY04-FY08 has been 8.7 per cent. Economic growth in FY08 is expected to fall to 8.7  per cent from 9.6 per cent in FY07, but momentum is still strong and bodes well for fiscal consolidation.

The states' aggregate revenue deficit fell to Rs55.66 billion (0.1 per cent of GDP) in FY07 (revised estimate) from Rs634.06 billion (2.3 per cent of GDP) in FY04 and is expected to generate a surplus of Rs119.73 billion (0.3 per cent of GDP) in FY08 (budget estimate).