A World Bank report on state finances has warned that Maharashtra is heading towards insolvency by 2005-06 unless its revenue and deficits besides debts (including off-budget borrowings) are reigned in.

The report also comments on the liability overhang (estimated at Rs 4,000 crore (Rs 40 billion) by the state finance department at the beginning of 2002-03) with the treasury issuing post-dated cheques from revenues collected in a current year to pay for the expenditures incurred in the previous year.

In a Maharashtra-specific analysis the report states: "In order to test whether the fiscal situation is sustainable, the revenue and consolidated fiscal deficits are projected over the medium term.

"Assuming that the state government does not undertake any significant fiscal reforms during the next four years and revenue and expenditure items exhibit the same trends as in the past, the analysis reveals an explosive path for these deficits during the 2002-03 to 2005-05 period."

According to the report the revenue deficit would rise from 2.1 per cent of the gross state domestic product at the end of 2001-02 to 3.7 per cent by the end of 2005-06.

Similarly, the consolidated fiscal deficit would increase from 4.1 per cent of the GSDP in 2001-02 to 6.6 per cent by the end f 2005-06.

"In turn, the debt of the state government, including off-budget borrowings, more than doubles from Rs 65, 250 crore (Rs 652.5 billion) in 2001-02 (debt to GSDP ratio of 23 per cent) to Rs 1,49, 370 crore (Rs 1,493.7 billion) (debt to GSDP ratio of 34 per cent) by the end of 2005-06," the report adds.

Commenting on the liquidity crunch being experienced in the state the WB report says that the state would not be able to cope with such a high level of debt and deficits.

"The state is experiencing liquidity problems of unprecedented magnitude. Maharashtra has been in over draft (after breaching the limit for normal and special ways and means advance from the RBI) for 118 days during the first 11 months of 2001-02, as against 31 days in the previous fiscal and seven days in 1997-98.

"The total amount of overdrat exceeded Rs 29,000 crore (Rs 290 billion) during the 2001-02 fiscal as against Rs 5,200 crore (Rs 52 billion) in 2000-01," the report adds.