Perhaps the most important challenge for the newly elected government in West Bengal is to set its fiscal house in order. Years of inaction on the public finance policy front have made West Bengal perhaps the worst fiscally managed state in the country. The state government was busy window dressing the public finances to show that the deficit was within limits or busy apportioning the blame on the Centre, but neither cared to listen to the critiques nor undertook any corrective measures for almost two decades. The general trend of significant improvement in public finances at the state level seen in the current decade largely bypassed the state, which continues to languish in large deficits and debt on the one hand, and low levels of development expenditure on the other. Not surprisingly, the 13th Finance Commission singled out West Bengal, Kerala and Punjab for a special adjustment path and set targets of revenue and fiscal deficits as a ratio of GSDP from 2011-12. Much of the efforts of the new government will have to be directed to meeting these targets and it will have little leeway to undertake development programmes until these stiff targets are met.
The poor state of public finances in West Bengal and its comparison to the average position in the general category states can be surmised from the selected fiscal indicators summarised in Table 1. Although both revenue and fiscal deficits have shown a marginal improvement in the state, the magnitude of these deficits continues to be large. The revised estimates for 2010-11 show that while the general category states in 2010-11 generated a revenue surplus of 1.6% of GSDP, West Bengal had a deficit of 3.1%. With a fiscal deficit of about 4%, there was hardly any worthwhile capital expenditure in 2010-11. In fact, the actual revenue and fiscal deficits for the previous year were 5.4% and 6.3% respectively and it may not be surprising that when the accounts are finalised for 2010-11 the deficits may be even higher.
West Bengal has a history of indulging in large deficits and debt. Both revenue and fiscal deficits in the state were substantially higher than the all states averages and the difference has been steadily increasing over time (Table 1, Figures 1 and 2). The debt to GSDP ratio in the state in 2010-11 is estimated at 43.4% as compared to the average of 25% for the general category states. Indeed, the outgoing government never believed in anything called inter-generational equity or thought that it could get bailouts at the cost of the national taxpayer. With interest payments claiming 55% of the revenues of the state in 2010-11, there was very little revenue left for spending on infrastructure. The 13th Finance Commission has set the target of reducing revenue deficit to 1.6% in 2011-12, 1.1% in 2012-13, 0.5% in 2013-14 before phasing it out in the next year. Complying with this is truly a herculean task and the government will have to embark on fiscal reforms without any further loss of time.
In general, the public finances of state governments have shown a significant improvement during this decade, thanks to a variety of benign factors. The revenue deficits in general category states declined by over 3.1 percentage points and even after the pay revision, the general category states taken together generated revenue surpluses (Table 2). The improvement was made possible due to lower interest payments on account of debt swap, rescheduling and write off on the one hand, and high buoyancy of central taxes resulting in substantially higher tax devolutions on the other. Moreover, the introduction of value-added tax (VAT) in 2005-06 turned out to be a money spinner for many states and the general buoyancy in urban housing and the real estate market resulted in higher collection of stamps and registration fees as well. However, these benign factors seem to have bypassed West Bengal. The improvement seen in the state is only marginal. The revenue deficit showed only a marginal decline by about 0.8 percentage points since 2004-05. While the Centre?s transfers to West Bengal as a ratio of GSDP increased by 1.1 points, the state?s own revenues declined by 0.2 points. Further, even as interest payments declined by over 1.7 points, other revenue expenditures increased substantially to create a large divergence between revenue receipts and revenue expenditure. Further, whereas the improvement in the finances of the general category states is also reflected in higher capital expenditures by over one percentage point, it was stagnant in West Bengal.
A closer analysis shows that the new government will have to undertake reforms on both revenue and expenditure sides. At 4.4%, West Bengal had the lowest tax-GSDP ratio among the major states in 2010-11 and was clearly 2.4 percentage points lower than the average for general category states. Ironically, the tax-GSDP ratio has remained virtually stagnant in the state even after the introduction of the VAT. In fact, the stagnancy in the tax ratio is seen for over two decades and when successive Finance Commissions and critiques pointed this out, the state went about finding excuses rather than rather than trying to set the house in order. In fact, the National Security Depository has recently made a detailed analysis of the ways to strengthen the information system for administering the VAT, which the new government should take up for implementation. It would also be advisable for the new finance minister of the state either to have a detailed study conducted to identify the measures to enhance revenues or to appoint a tax reform committee that should report within six months for the state to implement reforms in the next year?s budget.
On the expenditure side, the revenue expenditure of the state is close to 15% of GSDP, but the share of expenditures on social and economic services in the state is 60% as compared to 67% for the general category states. Given that the state is burdened with large outstanding liabilities, it is not surprising that interest payments constitute almost 20% of the state?s revenue expenditures. As the state did not adhere to the recommendations of the 12th Finance Commission in enacting the Fiscal Responsibility Act and adopting a medium term fiscal plan to undertake fiscal consolidation, it could not gain from the debt rescheduling and write off recommended by the Commission. The outgoing government has now enacted the fiscal responsibility act and should, therefore, gain from rescheduling of central loans consolidated until 2004-05. The challenge is to adhere to the targets and this is not going to be easy as additional revenue generation and compression of expenditures will hurt various interest groups. The inadequacy of resources has placed severe constraints on both maintenance and creation of infrastructure and the new government will have to find ways and means to improve the infrastructure, if it has to attract private investments.
The fiscal reform for the new government in West Bengal will be a major agenda. Hopefully, the government will take a long-term perspective and start mounting the building blocks for sustainable and growth-oriented public finances in the state.
The author is director, NIPFP. Views are personal
