The preemption of borrowed funds on current expenditures has caused a sharp decline in States' capital outlay and the proportion of GFD being utilised on capital outlay has come down to 34.5 per cent in 1998-99 from 51.5 per cent in 1997-98.

"Many State governments have taken initiatives to raise tax and non-tax revenues to stem the persistent deterioration in the revenue account. Nonetheless, the revenue deficit is expected to widen to Rs 43,236 crore in 1999-2000 as compared to Rs 40,539 in the previous year. This is on account of a steep rise expected in the States' revenue expenditure --particularly the non-developmental revenue expenditure, which is expected to rise by 24.1 per cent," the RBI annual report said.

The apex bank reportcautioned that the increasing burden of interest payments will weigh very heavily on State finances. "State governments can no longer rely on SLR obligations to satisfy their market borrowing programme at concessional rates and have to borrow at market-related interest rates," RBI said, adding that the the reform of state finances has gained significance with their fiscal deficit reaching an unsustainable level of 4.3 per cent of GDP in 1998-99.