In July 2002, Mr Jaswant Singh constituted a high-powered committee to assess the fiscal situation in different states. A report was submitted in September. As a sequel to this, West Bengalís finance ministry has now produced a document cataloguing the governmentís fiscal problems and suggesting solutions. It is possible to empathize with much that is said in identifying problems. For instance, major reasons for deterioration in the fiscal situation are the impact of the fifth pay commission on states, high debt costs from the Centre, revenue shortfalls at the Centre with correspondingly reduced state shares, the downturn contributing to reduced state revenues and more stringent Reserve Bank of India norms on overdrafts. Besides, West Bengal suffers from the coal royalty anomaly.
There are different layers in this catalogue of problems and reduced tax revenue at both Central and state levels are a function of downturn. They are transient problems and there are signs of recovery. It is also possible to argue that political economy considerations apart, there was no reason for West Bengal to follow the fifth pay commissionís recommendations and it could indeed have been the first state to set a different trend. Nor is there any compulsion to borrow from the Centre at 12 per cent, which is indeed high. The problem is that given the debt overhang, West Bengal will find it impossible to find lenders at the market-borrowing rate of 7 per cent (which the document cites).
The more serious problem is with solutions suggested, with a tendency to pass the buck to the Centre. Soft loans from the RBI to fund state-level salary and pension bills are not free lunches. They involve regressive transfers from the poor (who bear the opportunity costs) to state government employees. Suggestions about state shares in value added tax, service sector taxation and debt restructuring are not new. The problem is that states want doles through debt restructuring without accepting fiscal discipline. This is equally true of the argument about transferring centrally sponsored schemes to states. The Centre is not averse to the idea provided that states guarantee transfers to beneficiaries. This is especially important for West Bengal, where comptroller and auditor-general reports have illustrated leakage and fund diversion. The emphasis on Centre-state diverts attention from devolution within the state. West Bengalís documented attempts at revenue generation (land revenue, stamp duty, registration fee, petrol and diesel cess, court fees, user charges on water) and expenditure reduction (government vehicles, telephones, travel, entertainment) are minor. Without appropriate user charges for everything (water is just a beginning) with targeted subsidies and reform of state-level public sector enterprises, the stateís fiscal problem will not disappear. This document is confused on the issue. It lambasts liberalization, promises that the government is thinking about introducing competition in education and also simultaneously assures the support base that no significant PSE reform will take place. What West Bengal thinks today, other states have done yesterday.