In a pre-Budget meeting with finance minister Pranab Mukherjee on Wednesday, state finance ministers demanded relaxation in the fiscal deficit targets and asked the Centre to bear a portion of salary hikes being given to state government employees. The Centre should bear 50% of the cost of implementation of the 6th Pay Commission recommendation in states, said Bihar finance minister Sushil Kumar Modi.

The issue of food price inflation came up as another a major discussion point in the six-hour long meeting. Calling for a collaborative effort on the price front, Mukherjee asked states to lift surplus food stocks allotted to them in order to combat inflation The minister pointed out that there was enough wheat and rice stocks and proposed open market sale for offloading of these stocks to increase availability in the market, which would in turn ease prices.

Off take of surplus stock by the state governments are not satisfactory. Therefore, all the state governments may cooperate in this regard to lift these surplus stock allotted to them, Mukherjee said at the meeting. He also called for efforts to increase farm productivity. FM said though 5 lakh tonne rice was given under the PDS (public distribution system), to be lifted under open market system, states lifted only 2.5 lakh tonne, said Kerala finance minister TM Thomas Isaac.

Echoing state ministers sentiment, West Bengal finance minister Asim Dasgupta said there was a need to move away from adhering to deficit targets set out in the Fiscal Responsibility and Budget Management (FRBM) Act.

Why is this mechanical obsession with this fixing proportion of fiscal deficit to GDP or to states GDP. The time has come when all of us are asking for an enhanced role of the government, we have to judiciously relax and review the FRBM restrictions on fiscal deficit, Dasgupta said. Studies reveal that there is no co-relation with rate of inflation and fiscal deficit, he adding, adding that such a relaxation will help in boosting spending in the infrastructure and other crucial sectors of the economy.

Mukherjee, in his speech, urged states to return to the path of fiscal consolidation as early as possible.

Kerala FM Isaac said, There was a near consensus on the demand made by the states that fiscal deficit cannot be brought down to 3%. Andhra Pradesh, Bihar, Gujarat Kerala demanded 4% fiscal deficit, calculated on the basis of CSO (Central Statistical Organisation) estimates,not on the basis of the 12th Finance Commission figures of state income, which is a severe injustice. It looks like the central government would be flexible in this. We should be allowed to borrow up to 5% of out state GDP from the 4% seen now. This will allow states access to about Rs 20,000 crore. For Madhya Pradesh, it would mean additional borrowing of Rs 1500 crore, said Madhya Pradesh finance minister Raghavji.

Mukherjee assured states that there would be no hasty withdrawal of the fiscal stimulus package, while projecting a GDP growth of 7.75% in 2009-10