Quiet trouble in West Bengal

Financial Express, 28 March 2007

When the political turmoil in Nandigram dies down, one unfortunate fallout of the dramatic story could be a slowdown in private infrastructure investment in West Bengal. At the same time, the deep fiscal stress of the state will not allow much public investment. Slow growth of manufacturing will limit the ability of the state to generate own revenues. At a time like this it is important to lay down all the facts in front of the public and garner its support. Alas, this is not being done.

When West Bengal Finance Minister Asim Das Gupta stood up to present his budget for 2007-08 he practically congratulated himself on the gains made in fiscal consolidation. The text of the budget speech misrepresented the situation. The numbers of the budget numbers reveal that the West Bengal is in a deep fiscal crisis. Dasgupta ended his speech by saying (para 4.9):

"Honourable Members may kindly note that the total deficit for the next year was estimated at Rs 153 crore. However, with the proposed additional revenue mobilisation of Rs 150 crore the final deficit falls to the level of only Rs 3 crore. It is with this limited deficit that I conclude the proposals of this State Budget."

This appears like an astonishing position of strength. The budget numbers, however, tell a very different story. The term "total revenue" only refers to the cash withdrawl and not to the overall borrowing by the state. We therefore look at the revenue deficit numbers. The net revenue deficit for 2007-08 is estimated to be Rs 7,032.77 crore. As Prof Amaresh Baghchi, eminent economist and member of the eleventh finance commission, says, the borrowings of the state are shown as receipts in the "total deficit". West Bengal is in deep fiscal stress, with a problem it urgently needs to address. To enlist the support of the people in addressing this problem, the Finance Minister must show actual deficit numbers transparently rather than obfuscate issues by talking about small total deficits.

While most states have signed up for the state level fiscal responsibility legislation that bind them to control their deficits, West Bengal has not been in a position to sign up for the Fiscal Responsibility Legislation due to the precarious fiscal position of the state. While most states have signed up for the New Pension System in order to obtain a grip of their fiscal crisis, West Bengal has avoided the NPS for political reasons, even though West Bengal has the biggest problem with pensions. In recent years the West Bengal government appears to be making some effort on getting the state out of the financial mess it is in. But this is not an easy task. The fiscal performance of West Bengal in the nineties was amongst the worst in Indian states. Twelfth Finanace Commission estimates show that West Bengal ranked the worst among all states in terms of its revenue deficit in the years 2000-03 when its revenue deficit stood at 5.47 percent of Gross State Domestic Product.

The Commission report also shows that the revenue deficit in West Bengal worsened sharply from 1993-96 to 2000-03. Second from the bottom in the list of all states, it worsened by 3.95 percent of GSDP. The fiscal deficit in West Bengal was also the second worst. In 2000-03 the fiscal deficit in West Bengal stood at 7.31 percent of GSDP. The slippage in fiscal deficit over the period 1993-96 to 2000-03 was the worst among all states. It fell by 4.13 percent of GSDP. West Bengal has also been the worst performer in terms of own tax revenue collection. It collected 4.26 percent of GSDP as taxes. Even Bihar collected more of its production as taxes (at 4.46 percent of GDP) than West Bengal. Instead of improving, as most states did on this front, West Bengal saw a decline in own tax revenue over the period 1993-96 to 2000-03 by 1.2 percent of GSDP.

In recent years many states have seen an improvement in state finances. In aggregate, the fiscal consolidation at the level of states has meant that states aggregate revenue deficit has delined from 2.6 percent of GDP in 2001-02 to 0.5 percent in 2005-06. This has led to a reduction in fiscal deficit from 4.3 percent to 2.4 percent. In the improvement in state finances less than one-third (28 percent) is due to expenditure compression, the bulk (72 percent) is due to improvements in revenue. State revenues primarily improved on account of three elements -- higher TFC transfers, higher buoyancy of central taxes since 2002-03 thus yielding bigger transfers of tax revenue from the centre, and increased grants for various Central government schemes. But there is also an improvement in revenue efforts of states. Andhra Pradesh, Chattisgarh, Gujarat and Jharkhand have seen revenue growth of more than 30 percent.

With Asim Das Gupta, who has led the effort on State VAT, West Bengal needs to gear up and put its finances in order. The first place to start with is a statement of facts. To congratulate himself on total deficit numbers instead of clearly stating the borrowing requirements of the budget is misleading and meaningless. Since the state has been borrowing from all possible sources, especially from small saving schemes, its interest payments are high and it will need to make a phenomenal revenue effort to get out of its fiscal stress. The state needs to engage in expenditure compression, including signing up for the New Pension Scheme. Finally, the state needs to sign up to participate in the FRBM process at the state level.

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