The Telegraph
Since 1st March, 1999
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- West Bengal should be aware of the possible debt trap ahead

'For West Bengal Red denotes more than the colour of its ideology. It is also the colour of its economy,' says a news report, referring obviously to the state of West Bengal government's finances. 'A Planning Commission review of the state's performance for 2004-05,' the report goes on to say, 'contends that West Bengal (WB) is close to the debt trap with high borrowings and a spiralling revenue deficit. For the Plan Panel there is little hope for the state deep in borrowings.' The Union finance minister, P. Chidambaram, is also reported to have spoken in a similar vein on his recent visit to Calcutta, naming West Bengal as one of the most 'debt-stressed' states.

A state is said to be in the debt trap when the state government has to borrow not only to service its debt but to meet even its other commitments, like payment of salaries and pensions, and keeps borrowing at a cost that outstrips its revenue accrual. For, in such a predicament, debt grows explosively, presaging the collapse of the public sector, rendering it unable to pay its employees and run the basic public services. While apparently such a contingency has not arisen yet in West Bengal, from all accounts its public sector is in poor shape, leaving government assets in decay and public schools and hospitals languishing for lack of funds. For several years now the state cannot meet its committed expenditures, such as interest payments, salaries and pensions from its current receipts, and borrows heavily simply to keep the government going.

Warnings about West Bengal's debt trap may however seem a little perplexing to the people of the state, used as they are to being presented with 'zero or near-zero deficit budgets' by their finance minister year after year. Even when the state's borrowings run to thousands of crores the budget speech ends up by highlighting the 'overall surplus/deficit', which is only the residue of the budget gap that remains uncovered after borrowing and represents merely the change in cash balances. The budget speech for 2005-06, for instance, talks of a budgetary deficit of only Rs 5 crore, when the state's fiscal deficit (the excess of aggregate expenditure over current receipts) stands at Rs 10,572 crore. The fact of the matter is that, since 1999-2000, West Bengal borrowed, on an average, over Rs 10,000 crore every year to meet its fiscal deficit.

During 2000-03, as a proportion of the state's gross domestic product or GSDP, West Bengal's fiscal deposit measured 7.3 per cent, the highest among all the major general category states. Nearly two-thirds of these borrowings were used for meeting only the revenue deficit or the gap between current receipts and current expenditures and measured 5.5 per cent of GSDP. Deficits were not so large earlier but almost always above the average.

Persistent large deficits led to a massive accumulation of debt. West Bengal's debt as a proportion of its GSDP went up from 23 per cent in 1993-96 to 43 per cent in 2000-03. As a result, the share of interest payments as a proportion of total revenue receipts shot up from 20 to 44 per cent and now stands at 49 per cent. For various reasons, not all within their control, there was a deterioration in the finances of all states in the closing years of the last decade which persisted in the opening years of the current decade too, but, as the figures in the above graphics show, growth of deficits and debt in West Bengal was way above the average.

In recognition of the debt problems of the states, the twelfth finance commission was asked to review the position and suggest corrective measures. The commission has come out with an innovative scheme for reducing the debt burden of the states, which will require the states to take concrete steps to reduce their deficits.

Many states have since launched wide-ranging reforms to consolidate their budget to avail of the benefits of debt relief held out under the commission's scheme. There were signs that the states were coming out of the crisis in their finances even before the twelfth finance commission's scheme came into operation. In 2004-05, the combined fiscal deficit of all states stood at 3.8 per cent and revenue deficit at 1.4 per cent. According to latest budget estimates, at least four general category states have eliminated deficits in their revenue budget and are well on their way to reducing the fiscal deficit to 3 per cent of the gross domestic product as stipulated in the twelfth finance commission's scheme. There has been some improvement in West Bengal too, but the state is yet to get out of the woods.

Going by revised budget estimates, in 2004-05 West Bengal's fiscal deficit, put at Rs 11,875 crore, worked out to 5.4 per cent of GSDP. The revenue deficit too continues to be high (Rs 8958 crore) forming around 4.5 per cent of the state's GSDP. West Bengal's debt measures 490 per cent (or almost five times) of its total revenue receipts, whereas for the general category states, the average is no more than 270 per cent or 2.7 times. As already noted, the deficit in West Bengal's budget for 2005-06 also remains high with fiscal deficit of over Rs 10,000 crore and revenue deficit of Rs 7,023 crore. Interest, salaries and pensions continue to surpass the entire amount of the state's revenue receipts, including normal central transfers. No other major state in the country is now in this predicament. While several other states, barring those having a revenue surplus, continue to have deficits in their revenue budget ' implying that a part of their current expenditures is financed by borrowing ' the proportion of the borrowings used in financing current expenditures is among the highest in West Bengal (over 70 per cent).

Borrowing to finance government expenditures may not be a matter of worry so long as the amounts borrowed are used for productive purposes like investment and building up social and physical infrastructure that serve to strengthen state's economy and its revenue base, and the the rate of interest is not above what the government can realistically expect to raise by way of revenue through taxes or return on investments. Where the debt level is already high and the interest rates on borrowing are higher than the rate of revenue growth, in order that the debt situation does not get out of control, it is necessary to ensure that the expenditures (excluding interest payments) do not exceed the available revenues, and the budget produces a surplus excluding the interest payments ' 'primary surplus' as it is called in fiscal parlance.

Over the last decade and until very recently, West Bengal was borrowing at an average interest cost of about 13 per cent, while between 1993-94 and 2004-05, the state's revenues from its own sources grew by barely 11 per cent. And all these years, the state was having a sizeable excess of expenditure over revenue in the budget, even after interest payments were excluded. Of late, the rates of interest on borrowings have come down and the average cost of borrowing works out to about 11 per cent. But the growth of the state's own revenues has currently slumped to less than 9 per cent. There was a spurt in 2003-04 but it did not last. Given this reality, the warnings about a debt trap ahead cannot be dismissed out of hand. The fallout of the fiscal stress on the state and the directions in which action needs to be initiated to get out of it are briefly outlined in the concluding part of this article.

To be concluded

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