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Ask in haste, repent in leisure
The price of moratorium

Calcutta, April 22: A moratorium is not the magic bullet that can slay Bengal’s fiscal demons, several economists have said, pointing out that postponing the inevitable will be of little use unless backed up by a revenue mobilisation road map.

Chief minister Mamata Banerjee had yesterday set a 15-day deadline for the Centre to announce a three-year moratorium on the payment of interest on the loans Bengal had taken.

“A moratorium on repayment obligations can never solve the problem for Bengal. Unless the state works out a detailed plan on revenue mobilisation, the problem will persist. A moratorium doesn’t mean a waiver, which means the state will have to pay after three years. The question is, how will they pay?” asked Atul Sarma, a member of the Thirteenth Finance Commission.

Centre-state financial relations are determined by finance commissions that are set up periodically. (The 13th commission had given the report for 2010-15.) The Centre has very little leeway in giving funds or recasting debt beyond the terms set by the finance commission.

Bengal’s accumulated outstanding debt stands at Rs 2.08 lakh crore, according to revised estimates for 2011-12. The list of creditors includes banks, financial institutions and even common people. (See chart)

“The Centre will have to pay the creditors even if it allows a moratorium for Bengal. That means, the fiscal situation of the Centre will worsen. If other states also start demanding the same, it will result in a crisis,” said S. Mahendra Dev, a member of the Planning Commission.

Union finance minister Pranab Mukherjee’s aim to attain a fiscal deficit of 5.1 per cent of the GDP may go haywire if other debt-stressed states like Kerala and Punjab place similar demands.

Some state ministers have been quoting a figure of Rs 22,000 crore as annual outgo in the absence of a central moratorium. The figure has been useful to put the state’s plight in perspective: the state has been earning a little over Rs 21,000 crore in revenues but paying nearly Rs 1,000 crore more to service its debts, most of which were run up when the Left was in power.

If Mamata is indeed keen on a moratorium totalling Rs 22,000 crore, it could mean that she is also looking for a freeze on repayment of the principal outstanding amount, not just interest payment.

On February 6, state finance minister Amit Mitra had given a break-up of the annual outgo on account of past borrowings.

“We are paying Rs 15,093 crore annually as interest and Rs 5,390 crore as principal repayment every year. If the Centre grants a moratorium and this amount can be spent for three years on development, there would be an infrastructure revolution in the state,” Mitra had said.

In its pre-poll manifesto, the Trinamul Congress had promised to create much-needed physical infrastructure to give industry a big push in Bengal.

One economist drew attention to another phrase that gained currency recently, partly because of Mamata: federalism. “When she (Mamata) was fighting for the election, she was well aware of the financial situation of the state. Now she cannot ask the Centre to bail her out. This is anti-federalism as it is not right to ask the national taxpayer to pay for the fiscal mismanagement in Bengal,” said M. Govinda Rao, the director of the National Institute of Public Finance and Policy.

Rao agreed that the new government was not responsible for the fiscal mess in Bengal but he posed a question for the Mamata government that is at the doorstep of its first anniversary in power.

“Bengal has one of the lowest tax to state domestic product ratio, which means the state’s own tax revenues are very low. What has her government done to raise tax revenues?” Rao asked.

In the first full budget of the new government, Mitra proposed to mop up an additional Rs 200 crore in taxes but did not provide details of his projections except for expressing his intent to raise the tax on a few luxury items and introduce entry tax.

At the same time, the Mamata government is carrying on with the Left legacy of borrowing to finance expenditure. Although the new financial year is less than a month old, the Bengal government has already announced its plan to mop up Rs 2,500 crore from markets through the sale of 10-year state development loans.

Through this first tranche of market borrowing, the state government will exhaust around 14 per cent of its annual market borrowing ceiling of Rs 17,828 crore.

“After this, we could borrow another Rs 15,328 crore from the market over the next 11 months, unless we manage to have the ceiling enhanced through repayment of loans, like last year,” said a finance department official.


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