Gross fiscal deficit of the state governments is expected to decline to four per cent of GDP in 2003-04 from 4.7 per cent in 2002-03 following continued efforts towards fiscal consolidation, Reserve Bank of India has said.

"The state budgets envisaged continued fiscal consolidation through revenue augmentation and containment of expenditure and revenue deficit is expected to narrow down from 2.5 per cent of GDP in 2002-03 to 1.8 per cent in 2003-04," RBI said in its annual report released in Mumbai on Wednesday.

"There is an urgency to halt the dissavings of the public sector, reflected in rising pre-emption of resources through the revenue deficit," RBI said adding the inflexibility in fiscal deficit and decline in public sector outlays on social and physical infrastructure have been the dominant concerns of the fiscal stance for 2003-04.

Some state governments have taken steps to enact law for fiscal responsibility with recourse to hard options like attacking the earmarking of funds for current expenditure.

RBI, however, cautioned states on their efforts at raising revenue through taxes and said, "in the current phase of business cycle, the priority for revenue augmentation has to be tempered with the need to stimulate investment demand and maintain consumption expenditure."