The Telegraph
Since 1st March, 1999
Email This Page
- Fiscal correction in West Bengal must focus on revenue

One adverse consequence of the state's fiscal stress has been its inability to find resources for meeting the targets of plan outlay. Mid-term appraisal of the 10th plan reveals that in the first four years of the plan West Bengal could reach only 52.5 per cent of the targeted resource level as against 91 per cent in Karnataka and 87.7 per cent in Andhra Pradesh. With capital expenditures already at a low level (less than 2 per cent of the state's gross domestic product, lower than the major states' average), evidently fiscal constraint has taken a heavy toll on development.

The obvious course to get out of fiscal stress is to cut expenditures or raise more revenue or both. While the state has been trying to reduce its expenditures by belt-tightening, and employing contractually appointed hands on low salaries in health and education, the scope for expenditure contraction West Bengal is extremely limited, most of it being committed. Besides, compared to other states, expenditure levels in West Bengal other than interest payments are not all that high. As may be seen from the table, for all its commitment to growth and social welfare, the government's spending on social and economic services per capita in West Bengal is lower than even in some of the poorer states. So much so that the 12th finance commission found it necessary to include West Bengal among the states for whom a special grant was recommended for bringing up the level of revenue expenditures on education a bit closer to the national average. In the infrastructure development index, West Bengal figures in the 'lower middle' range. In this background, while the scope for economy in expenditure wherever possible must be explored, fiscal correction will need to focus strongly on the revenue side.

For the root of the fiscal malaise of the state lies primarily in the low level of its revenues. While other factors like salary revision and drop in Central tax devolution were at work in creating the fiscal crisis of the states in the late Nineties, most other states have since bounced back, mainly through their own effort in resource-raising, leaving West Bengal behind.

In West Bengal, the ratio of total revenue to GSDP has hovered around 7 per cent in the last few years as compared to 11-12 per cent in other major states. It will not do to attribute this to discrimination by the Centre in the mater of devolution of funds. Transfers from the Centre have consistently formed around 45 per cent of the state's revenue receipts, more than double the average for high income states and almost equal to that of the poorer states. West Bengal received the maximum amount among the major states next to Orissa as grant-in-aid to meet revenue deficits from the 11th finance commission. Under the dispensation of the 12th finance commission too, West Bengal is the only state among the high income group (other than Punjab and Kerala) to have been given a grant to bridge its revenue deficit. It is the poor tax effort of the state that is responsible for West Bengal's low revenue level.

West Bengal's tax ratio (proportion of taxes raised by the state to the state's GSDP) is notoriously low, in fact, the lowest among the major states. As of 2003-04, the ratio stood at 4.7 per cent as against over 9 percent in Tamil Nadu, Kerala and Karnataka and the average of nearly 7 per cent for the major states. Per capita revenue from the principal state taxes in West Bengal is also among the lowest (vide table).

The level of revenue from non-tax sources to GSDP also is the lowest in West Bengal, 0.6 per cent of GSDP as compared to 3 per cent in Haryana, 2 per cent in Rajasthan and 1.9 per cent in Orissa. Evidently, cost recovery from the public services and the returns from the lendings and investments of the state are also extremely poor.

The other factor that has exacerbated West Bengal's fiscal trouble is the tendency to borrow from all possible sources, regardless of the cost, and use borrowings largely to meet current expenditures. Until recently, the principal avenue for borrowing by the states has been loan from the Centre and the National Small Savings Fund. The NSSF, run by the Centre, receives the amounts accruing from small savings schemes and lends to the states on 'origin basis', that is to say, small savings collected in a state are passed on entirely to the state concerned. The rate of interest on Central loans and borrowings from the NSSF however have been high ' higher than what prevails in the market. West Bengal has relied heavily on the NSSF to meet its fiscal deficit. This has cost the state dearly.

The 12th finance commission's plan for alleviating the debt burden of the states to which a reference was made earlier consists of a two-part scheme. One is the proposal for the consolidation of Central loans outstanding on April 1, 2004 to be paid over 20 years at 7.5 per cent interest rate; the other provides for writing off the debt payable to the Centre during 2005-10. The facility of debt consolidation requires the states to enact a fiscal responsibility law undertaking to eliminate the revenue deficit completely and reduce fiscal deficit to 3 per cent of GSDP by 2009. Subject to the fulfilment of the prescribed conditionalities, debt write-off will be allowed in proportion to the reduction of revenue deficit.

As of now, 15 states have passed the FRL and others also seem to be preparing to get on board. While getting the benefit of debt consolidation may not pose much of a problem as it simply requires an FRL to be passed, eliminating the revenue deficit in five years is not going to be easy for West Bengal with a large level of deficits to start with. However, if the state is to avert the debt trap and access the debt write-off facility held out by the 12th finance commission, it has to step up its revenue collection substantially. For eliminating the revenue deficit, which now stands at around Rs 8,000 crore in five years, revenues have to be augmented roughly by about Rs 1,600 crore every year for the next five years. An increase in the tax ratio by 0.5 per cent of GSDP and 0.25 per cent in non-tax revenue would suffice. The state had a tax ratio of over 6 per cent in the past. There is no reason why at least that level cannot be reached again.

On the expenditure side, while the scope is limited, the subsidies implicit in low cost-recovery for public services can be reduced and so can the subventions to state enterprises, by offloading the loss-making ones. West Bengal's state electricity board is the recipient of the largest subsidy from the state exchequer. Speedy power sector reform is called for to end this.

Following the 12th finance commission's recommendations for a new borrowing regime for the states, the Centre has now stopped lending to the states, leaving them to borrow from the market, but mainly the NSSF, which is still a high-cost source. West Bengal, with other states, must reduce dependence on the NSSF and prevail on the Centre to allow them to have a wider choice in the matter of borrowing.

With a visionary and widely respected chief minister, it should not be beyond the state government to take measures, however tough, to rescue the state from its fiscal crisis. It is, however, essential to enlist the support of the people in this endeavour by placing the true picture of the state's finances before the wider public. Highlighting small 'overall deficits' a meaningless and misleading concept ' while the borrowings run to five digits is scarcely helpful. The budget should be transparent, so that even a layman can make out easily from the budget papers where the state stands in matters of debt and borrowing. That, alas, is not the case in West Bengal now.

Email This Page