Fiscal Crisis in West Bengal

The Statesman, Kolkata, carried a two-part article, yesterday and today, titled "In Fiscal Straits" on the fiscal crisis of West Bengal. The author, Bibekananda Ray, is a retired civil servant.

I am reproducing the articles here.

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Bengal Subsists On Overdrafts And Loans

The media and Opposition leaders have, for some time, been describing West Bengal as a bankrupt state because of the huge public debt the Left Front has incurred over the past 33 years. They claim that if an Opposition party or alliance forms the next government in 2011, it will be hamstrung by this debt and cumulative interest. On 3 July, Siddhartha Shankar Ray had remarked: “If West Bengal were put on auction now, there would be no buyer.”

The state has been facing a crisis since mid-November 2010. Continuously for a week, it took overdrafts from the Reserve Bank, forcing the finance minister to run to Delhi, take recourse to another market loan, raise excise duties and slash non-plan expenditure. Unless the Centre clears the controversial dues on account of coal royalty, West Bengal will be on the threshold of bankruptcy.

On 31 March this year, the state’s cumulative internal debt stood at Rs 192,499.77 crore; it has now exceeded Rs 194,000 crore. West Bengal is now the leading internal debtor among general-category states and the second largest borrower of Central loans (after Uttar Pradesh). It used to be behind UP and Maharashtra in the volume of Central loans, but in March this year it overtook Maharashtra. This reality has not been mentioned in the state budgets or the Economic Reviews and Statistical Appendices since the 1990s. Nor for that matter has it ever been disclosed by the finance minister, Dr Asim Dasgupta. The state exchequer has always been in a precarious condition since 1977. Once, a substantial loan had to be taken from a private insurance company to pay the wage and pension of government employees. In 2000-01, the state took a staggering 134 overdrafts from the RBI.

Most general category states take loans from the RBI and the market because their revenue receipts are generally less than revenue expenditures and cannot meet the development needs of a welfare state. Article 292 of the Constitution has set parliamentary limits and guarantees on public borrowing by the Centre and the states. What is unique about West Bengal is the large volume of its internal debt which can hardly be repaid by any government, unless the state enhances the rates of taxes, introduces new imposts or finds some other means of increasing revenues or reducing expenditure. On the contrary, the interest paid annually on the debt accounts for a large chunk of the government’s revenue, holding up development.

The 1977-78 vote-on-account budget before the June 1977 election showed a surplus of Rs 23.9 crore. This means that in 25 years (excluding the five years of three spells of President’s rule, two UF regimes and one led by Dr PC Ghosh) the Congress government incurred a cumulative deficit of Rs 17976.1 crore. In just eight more years, seven Left Front governments incurred a debt of nearly Rs 2 lakh crore rupees. The finance minister admits that a child born in West Bengal today has on its head a staggering state loan of Rs 22,000.

The Left regime has had two finance ministers ~ Ashok Mitra (1977-86) and Dr Asim Dasgupta thereafter. Mr Mitra resigned, following differences with Jyoti Basu on a particular issue, one that neither disclosed. Basu picked Dr Dasgupta, then an MIT-trained professor of Calcutta University. He contested the Assembly election in 1987 as a CPI-M nominee. A committed and hard-working Marxist, he was Basu’s favourite. Though Basu retired on 3 November 2000, he had to intervene to ensure his continuance in Buddhadeb Bhattacharjee’s cabinet after the 2006 election. The party gave him one year to show results. The employment scenario was grim and he had to dole out state largesse to keep the electorate happy. In the net, the exchequer was depleted. The government’s internal debt has risen to alarming levels over the past two decades. The jugglery with figures hasn’t helped.

Eight out of Mr Mitra’s nine years as finance minister saw budget deficits, but in 1986-87, he was able to show a surplus. The net deficit during his tenure was about Rs 9195.6 crore. Since 1988, after Dr Dasgupta took over, deficits went up considerably as revenue receipts had a free fall against revenue expenditures. From 1986 to 1991, the net deficit was Rs 19358.5 crore, but in the next five years (1991-96), it more than doubled to Rs 40844.3 crore and in the next five years (1996-2001), it went up by more than six times to Rs 261540.8 crore. The three kinds of deficit ~ fiscal, revenue and primary ~ peaked in 1999-2000, comprising 9.2 per cent, 7.3 per cent and 5.9 per cent of GSDP. The primary reason was the enhanced pay and pension to about 10 lakh government employees and over four lakh pensioners. He resorted to zero-deficit budgeting for four years ~ from 1988 to 1992, i.e. by not carrying forward the loans and deficits of previous years. In a mid-term fiscal reforms programme, signed with the Centre, he promised to contain expenditure by banning creation of new posts, freezing subsidies, limiting the rise in pension and holding back additional DA for retired and serving employees. As it turned out, he redeemed none of them.

The Asian Development Bank, after a joint study of the state’s economy in 2005, drew a fiscal consolidation programme which was also not followed. He has admitted to a shortfall in the collection of “Own Tax Revenue” since 1999.

West Bengal’s present internal debt of about Rs 194,000 crore is about 16 per cent of India’s. The state’s revenue deficit was steady at 3.1 per cent of the GSDP from 2005-06, but declined from the following year at the rate of 2.7 per cent. The 13th Finance Commission has advised the state to bring it down to 1.6 per cent in 2011-12, and to zero in 2014-15. The fiscal deficit, which was 4.1 per cent of the GSDP in 2005-06, fell to 3.7 per cent in 2007-08 and is targeted to be further brought down to 3 per cent in 2014-15. The state’s outstanding debt was 42 per cent of the GSDP in 2009-10; the Finance Commission has fixed a target of 40.6 per cent in the current year and of 34.3 per cent in 2014-15. On 31 March this year, its outstanding loan from the National Small Savings Fund (NSSF) was Rs 55430.60 crore; the interest payable with the reset rates will be Rs 4988.75 crore.

The collection of state taxes is increasing, but the cost is high and evasion widespread. A whopping Rs 263 crore is spent on collecting Rs 993 crore of land revenue. The current year’s budget estimates tax revenue of nearly Rs 35213.8 crore, which will be Rs 6647 crore more than the revised estimate of 2009-10. It estimates receipts worth Rs 63.34 crore on account of loans and advances to 37 categories and an outgo of over Rs 14018.49 crore on payment of interests on sundry loans, funds and advances, of which over Rs 11953 crore will go to pay interest on internal debt alone. The current year’s budget estimate covers 61 types of loans to various departments and institutions. West Bengal did not enact the FRBM (Fiscal Responsibility and Budget Management), as recommended by the 12th Finance Commission. Nor did it avail of the commission’s offer of debt or interest relief on Central loans since 2005-06, but it was granted waiver of debt and pre-payment for 2008-09. In the text of the FRBM Bill, drafted by the finance department, the government admits that it has not been possible to ensure prudence in fiscal management and fiscal stability by making the enactment during the tenure of the 12th Finance Commission. The Bill will impose strict borrowing curbs on the present and next governments.

The Net Result Of Reckless Populism

To understand its gravity, West Bengal’s outstanding debt position needs to be examined in the context of the country and other states. The Government of India has also incurred enormous internal and external debt. Yet their servicing has not impeded the spending on development. In terms of public debt, which is the cumulative total of all government borrowings less repayments in rupee, India ranks 34th. In external debt, the country ranks fifth in the world ~ after China, Russia, Turkey and Brazil.

In West Bengal, subsidies and populist measures were almost the order of the day ever since the Left Front took over. In last year’s budget, the total subsidy stood at Rs 422 crore. The latest sop is a pension scheme with accident insurance benefit for 15 lakh transport workers, to be financed by the cess of Rs 2 per litre of diesel and of 45 paise per litre of kerosene. Soon after the massive defeat of Left parties in the municipal election, a “land gift scheme” was revived. Every landless family will be given up to five cottahs (about 3500 sq ft) of arable land, buying it at up to 25 per cent more of the market price. In 1981, school education up to class XII was made free. To woo the electorate, the Left Front pursued a policy of appeasement instead of putting in place long-term infrastructure.

Unemployment allowance was introduced in 1978; widow and disability allowances followed. Dr Asim Dasgupta recently announced a 70 per cent increase in the salaries of college and university teachers. At least 331 posts of teachers were created in government colleges, in accordance with the GK Chaddha Committee recommendation.

Soon after taking over as finance minister, Dr Dasgupta abolished octroi (re-introduced last year) and the highway toll. Public undertakings were heavily subsidised to keep them running despite losses. The State Transport Corporations, for instance, have not earned a profit for the last five years; the total deficit since 2005 is Rs 518.42 crore.

The government has effected a marked increase in recruitment after the Left Front debacle in 2009. An urban employment scheme has also been announced with an initial outlay of Rs 250 crore. Another subsidy of Rs 422 crore has also been announced to sell rice and potato at Rs 2 a kg to BPL card-holders. The joint operation against Maoists is another unproductive expenditure. The CRPF recently demanded nearly Rs 7.5 crore for the first six months of its deployment in Lalgarh ~ up to December 2009 ~ on account of salary, accommodation, vehicles and fuel. The CRPF currently sends a monthly bill of Rs 1.25 crore.

West Bengal’s unspent public fund has been the highest among the states; in five years from 1995, it came to nearly Rs 8249 crore; in the same period, funds wasted and blocked amounted to nearly Rs 1349 crore and Rs 4237 crore, respectively. State employees have been pampered. On 27 May 1980, the code of conduct for government employees, a British legacy, was abolished and they were granted trade union rights, including the right to call and observe a strike The confidential report system, also a British legacy, was done away with. When Nelson Mandela visited Kolkata soon after his release in 1990, the third Left Front government advanced a donation of $5 million to facilitate the reconstruction of South Africa.

There has been a sharp increase in the salaries of state government employees and teachers following the implementation of the Sixth Pay Commission’s recommendations.

The current budget proposes an internal debt of Rs 36721.09 crore and a loan of Rs 63.34 crore, altogether Rs 36784.43 crore. Early this year, the state floated a market loan of Rs 2000 crore through the sale of bonds. The World Bank has agreed to lend Rs 920 crore to the gram panchayats in nine districts. The state government will provide a matching Rs 80 crore. To woo the Muslims, now veering towards the Trinamul, the Plan outlay for the Department of Minority Affairs and Madrasa Education has been increased from Rs 121 crore in 2009 to Rs 300 crore this year. The monthly pension of the old, disabled, widows, artisans, handloom weavers, farmers and fishermen has been raised from Rs 750 to Rs 1000. The exemption of VAT on sugar has been extended to 31 March 2011. Subsidy on electricity and foodgrain for the poor has been increased. To mop up excise revenue, licences have been issued to open foreign and country liquor shops.

The food minister announced that infirm BPL cardholders would receive 10 kg of rice every month free of cost. Duty has been imposed on cotton thread at the rate of one per cent of the cotton price under a 2002 Act which defines cotton as an agricultural product. A drive to collect property and services tax from rural households by panchayats began in 2003, raising the per capita average tax to Rs 21.64 with a target to collect Rs 300-400 crore.

Statistics do not convey the magnitude of the financial crisis in West Bengal. Populism has neutralised the occasional directives on austerity. As D Bandyopadhyay, former Union Revenue Secretary, has pointed out, a revenue deficit is more dangerous than fiscal. Unless the trend is checked, West Bengal will find itself caught in a debt trap... and ultimately, bankruptcy. So much for the fiscal position after 34 years of Left rule.