West Bengal's grim finances

Having assumed office in May, one of the foremost concerns of West Bengal Chief Minister, Ms Mamata Banerjee, was “resurrecting” the state's finances.

While her economist Finance Minister, Dr Amit Mitra, keeps projecting a growth in tax revenues, Ms Banerjee seems to have relied heavily on a “special package” from the Centre to fulfil her electoral promises.

But barely two weeks after her last month's visit to New Delhi, sections within the government are expressing doubts over whether the package will come through. They are also sceptical about whether the package can help the State overcome its financial constraints — it has the highest revenue deficit and the second highest fiscal deficit (West Bengal Government Finances: A critical Look”, EPW October 30, 2010) among all the States.

Tall order

Although the West Bengal Chief Minister has not been come out clearly on the issue, it is believed that she handed over a wish-list worth tens of thousands of crores of rupees to the Centre, seeking “special allocations” to bring the State out of a proverbial “debt-trap”, as well as ensure “proper development”.

Ms Banerjee's claim for exclusive treatment has run into opposition. Insiders suggest that the NDA (National Democratic Alliance) poster boy, Mr Nitish Kumar, was quick to remind the Centre that constrained with a minuscule revenue budget and an infamous legacy of under-development, Bihar deserved similar, if not more, attention from the Centre.

Reality check

There is little doubt that West Bengal is reeling under a huge debt burden, to the extent that its annual interest payment is greater than the development expenditure.

Interest payment (Rs 12,367 crore in 2008-09) as a percentage of development expenditure stands at an appalling 54.5 per cent – the highest in the country, after 26 per cent in the case of Rajasthan and a national average of 24.5 per cent.

A March 2011 RBI report clearly points to the spending habits of the State as the culprit. West Bengal spends nearly 67 per cent of its revenue receipts — the highest in the country after 45 per cent of Kerala — as “committed expenditure” (largely salaries and wages). To add to the trouble, nearly 34 per cent of the revenue receipts are spent on interest servicing — also the highest in the country after 21 per cent in the case of Punjab.

As the central bank puts it, West Bengal “could not contain its non-interest revenue expenditure, and net borrowing has been used to finance current non-interest expenditure”.

More expenditure

Though it is too early to comment on the financial management of the new Government, its early announcements do not indicate introduction of strong fiscal practices.

On the contrary, the proposed extension of Rs 2 per kg rice distribution scheme; recruitment of 46,000 teachers and large number of policewomen; withdrawal of VAT on LPG; forcing municipal bodies to withdraw plans to impose tax on water supply (and even disallowing the state power generation and distribution utilities to recover fuel surcharges to the extent of Rs 100 crore a month) indicate increasing pressure on finances.

However, insiders in the Government suggest that even Ms Banerjee is fast realising the futility of expecting Central largesse to help her tide over the financial mess.

With the Left agreeing to adopt the Fiscal Responsibility and Budget Management Act in 2010, there is not much fiscal space left either.

Relief on loan rates

The State government is pinning its hopes on the adoption of the Dr Shyamala Gopinath committee's recommendations, on reduction of interest on loans against small savings, to put a brief check on its mounting interest liability.

It is also hoping for the allocation of “specific purpose funds”, reportedly in the range of Rs 1,000-1,500 crore a year to fulfil part of the development agenda.

Initial estimates suggest that the Gopinath committee recommendations, if adopted, will enable the state to raise fresh borrowings (to the tune of Rs. 17,000 crore) during the year without any increase in its total interest liability.

Similarly, specific allocations by the Centre may help Ms Banerjee address development issues in the Naxalite-affected Junglemahal region; the Sunderbans; and other pockets of underdevelopment.

While Mr Mitra's commitment to enhance tax revenue is a step in the right direction, it is yet to be seen how the government fares in expenditure management. Considering the ‘popular' mandate, Ms Banerjee is not faced with easy choices.

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