In a recent study on the `State of State finances in India', they found that on an average, all state governments taken together spend around 60 paise of every rupee earned as revenue (or 60 per cent of their total revenue) on wages and salaries. In particular, states like Maharashtra (with 2.2 million employees), Andhra Pradesh (1.1 million employees), West Bengal (950,000 employees) and Kerala (520,000 employees) are spending a lion's share of their revenue on employees.

The study assumes significance as dowsizing the government by cutting excess flab has been touted as one of the key measures in achieving fiscal discipline at the state level. However, a good number of states are still caught in the vicious cycle, debt financing of revenue expenditure, which in turn pushes up their interest burden leading to further borrowings.

The study recommended that reducing the size of public administration could be the only way out for the states to come out from the fiscal mess they are trapped in now. "One way to achieve a reasonable degree of success in this direction might be a freeze on new employment, matched by normal attrition through retirement and death. Existing functions could easily be met through modest improvements in computerisation and information system", it says.Since 1987-88, the revenue deficit of the states has been rising steadily and the aggregate revenue deficit of all state governments put together has crossed 1 per cent of GDP, the study says.

In particular, higher fiscal deficit of the states are primarily on account of five states, namely, Uttar Pradesh, Tamil Nadu, West Bengal, Andhra Pradesh and Kerala. A very high proportion of the fiscal deficit is caused by the revenue deficits of the states of UP (69.8 per cent), Kerala (51.9 per cent), Tamil Nadu (49.8 per cent), Punjab (45.1 per cent) and West Bengal (42.3 per cent). In these states a major portion of the borrowing is pre-empted in financing the current expenditure, which naturally affects the quantum of resources available for developmental capital expenditure", the study says.

It adds that Maharashtra and Madhya Pradesh are the only exceptions where the increase in fiscal deficit, to a large extent, is due to a greater level of developmental expenditure.

Selling off state-owned enterprises that would raise significant funds should be considered as a major mechanism to bring down public debt. By doing so, the state governments could not only bring the stock of public debt down but also reduce the burden of interest on their revenues substantially, the study added.