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The fiscal mess left behind by the Communists in West Bengal

The fiscal mess left behind by the Communists in West Bengal
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First Published: Sat, Jul 02 2011. 05 27 PM IST
Updated: Sat, Jul 02 2011. 05 27 PM IST
The Left Front government has left West Bengal’s finances in a shambles. Most of the attention has been focused on the state’s debt burden of around Rs2 trillion. But that’s not all. A look at the Reserve Bank of India’s annual studies on state budgets shows that West Bengal is at the bottom of most fiscal indicators.
Here’s what one of the recent RBI reports said: “West Bengal, having a revenue deficit as well as a primary revenue deficit, indicated that the state could not contain its non-interest revenue expenditure and net borrowing has been used to finance current non-interest expenditure, with no potential scope for generating debt-financing income.”
Also see | A Precarious Fiscal Situation (PDF)
The state’s debt was 42.8% of its gross state domestic product, according to the revised estimates for 2009-10, and it was the second highest among the non-special category states. The highest percentage was Uttar Pradesh’s, at 43.5% for 2009-10. But while Uttar Pradesh’s debt to state GDP ratio declined in 2009-10, it increased for West Bengal.
Why is the state’s debt-to-GDP ratio so high? Simply because West Bengal has a very large fiscal deficit. In 2009-10, the state’s gross fiscal deficit to gross state domestic product was 6.7%, the highest among all the non-special category states except Goa, which too had the same fiscal deficit to state GDP ratio. The high fiscal deficit results in higher borrowing, which in turn has led to the huge debt burden. That’s not all—the state also has the dubious distinction of having the largest revenue deficit among all the non-special category states. In 2009-10, the revised estimates put its revenue deficit at 5.6% of the state’s GDP. This was much more than the other states, the next highest being Punjab, with a revenue deficit to state GDP ratio of 2.2%.
What’s more the ratio has been worsening—during the period 2005-08, West Bengal’s average revenue deficit to state GDP ratio was 3% and it was 4.2% in 2008-09.
Why is the revenue deficit so high? One reason is the state doesn’t tax its people. West Bengal’s Own Tax Revenue (OTR) as a percentage of its state gross domestic product was 4.1%, the lowest among all the non-special category states. Bihar, the second lowest, had an OTR to state GDP ratio of 5.3%. Non-tax revenue were also very low. The upshot is that the state’s revenue receipts as a percentage of state GDP was a mere 9.6% in 2009-10.
With such a low level of revenue receipts, West Bengal’s revenue expenditure was not particularly high. The salient fact here is that, because of its large debt burden, its interest payments as a percentage of state GDP was the highest among all non-special category states. A third of the state’s revenue receipts is used to pay interest.
Starved of resources, the state government could not do much for development, a factor that cost it dearly in the recent assembly elections. West Bengal’s development expenditure as a percentage of gross state domestic product in 2009-10 was 9.2% in 2009-10, the lowest after Kerala and Punjab. Contrast Bihar, with a development expenditure to state GDP ratio of 21.5%, although it’s true that transfers from the Centre contribute a lot of its resources.
Unable to live within its means, West Bengal was the only state that availed of overdrafts from RBI in the last three fiscal years, although it was joined by Punjab in the last two years and by Punjab and Haryana in 2010-11.
The lack of resources also led to a lack of investment by the state government and the West Bengal government’s capital outlay was a mere 1% of state domestic product in 2009-10. Only Kerala, another Left-ruled state, had a lower capital outlay of 0.9% of state domestic product.
But perhaps the West Bengal government, true to its ideology, has been spending a lot on social sectors? Well, it’s not at the bottom of the table, but its social sector expenditure as a percentage of state GDP is lower than that of many states such as Tamil Nadu, Karnataka, Rajasthan and Orissa.
A look at earlier RBI data gives us the state’s fiscal situation in 1980-81, during the very early years of Left rule. The state’s gross fiscal deficit was only 3% of net state domestic product in that year and the revenue deficit was a mere 0.2% of state domestic product.
In short, Mamata Banerjee’s government inherits a fiscal mess, with little scope for further expenditure unless it is able to woo private investment or unless help is forthcoming from the Centre.
Manas Chakravarty looks at trends and issues in the financial markets. Comment at capitalaccount@livemint.com
Graphic by Sandeep Bhatnagar/Mint
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First Published: Sat, Jul 02 2011. 05 27 PM IST