Like most states in the country, West Bengal’s debt burden has ballooned over the years to a point where the state is on the verge of bankruptcy. As of March 31, 2002, West Bengal had the second highest debt, Rs 57,358 crore, or about 10 per cent of what the states together owe the Centre — Rs 591,833 crore. Only short-sighted attempts are being made to mend matters. For example, only very important liabilities, such as debt obligations, are being met. But how long can this go on'
In December 2002, the state industry minister and planning board chairman, Nirupam Sen, had said that no new development project would be sanctioned in the next plan, only the bare minimum needed to continue with ongoing projects. Sen also mooted a nearly 75 per cent cut in plan allocations. Thus while the Central aid component for many projects has been spent, grants from the state government are not forthcoming. Worse, some departments pay salaries out of plan allocations.
As usual, Asim Dasgupta blames the Centre for this state of affairs. Expenditure on salaries and pensions spiralled to about 110 per cent of revenues following the fifth pay commission revisions in 1999. Two, 70 per cent of Central aid for states comes as loans at high rates of interest. All Central schemes are either loan-based or have major loan components.
The Federation of Indian Chambers of Commerce and Industry has prescribed a time-bound strategy to resolve the financial crisis in the state. This involves a one-time write-off of the accumulated losses of state undertakings. Going a step further, the World Bank has asked state governments to cap annual increments for employees and slash subsidies.
The Centre has proposed retiring up to Rs 30,000 crores in state debt at a nine per cent interest rate. But state chief ministers insisted the rate should be within seven per cent, the rate at which the Centre raises capital. The deputy chairman of the planning commission also agreed to consider the demand that half the Central development aid should come as grants. States now get only 30 per cent as grants: the rest comes as high interest loans.
The share of development in the total expenditure of states went down from 72 per cent in 1980-81 to 63 per cent in 1995-96. Non-development expenditure rose from 28 per cent to 37 per cent in this period, the result of the steep rise in interest payments from 30 per cent in 1980-81 to 40.5 per cent in 1995-96. This is because of the increase in public borrowing and financial sector reforms, which forced governments to pay market interest rates. This has meant a cut in investment in agriculture and social infrastructure.
This leads to a vicious spiral — wherein high deficit levels have to be financed by further debt, leading to an even higher interest burden and higher deficits. Not surprisingly, the only investments in state governments come from pension, provident and insurance funds and banks mandated to invest in them — which are not quite risk-free themselves.
In the 2002 Union budget, the finance minister had hoped that aligning the interest rates of the general provident fund with the much reduced rate at the Centre would help state governments trim their interest burden. The interest rate on plan loans and small savings loans was cut by a per cent to 10.5 per cent in April 2002.
It was also decided to retire Rs 25,000 crore of high cost debt every year over the next four years. This would result in the states getting a relief of about Rs 1,000 crore on the interest burden. But Dasgupta feels this is insufficient since the total interest burden of states is a huge Rs 69,000 crore. Besides, the relief would not impact the Centre’s fiscal deficit since this debt was mainly from small savings schemes. The debt retiring does not envisage retiring high-cost plan loans which amount to nearly Rs 99,700 crore.
A major part of the deficit of state government budgets is because of loans being used to finance expenditure. In the long run, this is just not sustainable.