The new finance minister of West Bengal may inherit empty coffers, but a magic solution to quickly fix the dented finances may lie in some accounting tweaks, something which the Left has been demanding.
The state’s debt may go down substantially in one go, if the burden of small savings is shifted or shared by the Central government. This may sound unrealistic, but not impossible, with Trinamool Congress’ convincing victory in the assembly elections, and its 19 Lok Sabha seats.
Small savings contributed Rs 79,000 crore, or 42 per cent, to West Bengal’s total accumulated debt of Rs 1.86 lakh crore. The Left Front government has not only been demanding debt relief on small loans, but also asking the Centre to share a part of the burden arising out of it. West Bengal has the third highest debt in the country, with Uttar Pradesh and Maharashtra ahead of it.
The difference between the amount saved by the people of any state in post-office schemes in a specific financial year and the entire withdrawal, is the net small savings for the state. It is passed on to states by the Union government as debt, and the state governments have to pay a fixed rate of interest on this debt. West Bengal stands first in the country in mobilising micro savings, but this in turn has boomeranged in the form of debt with a high rate of interest. The Centre gives each state a part of the amount raised through small savings as a 25-year loan, carrying 9.5 per cent interest. However, there is a moratorium of five years on the principal amount. In West Bengal, there are over 20 million small savers, making it the front runner among all other states.
“The Centre passes the small savings as loan. Small savings is a national level programme, and thus there needs to be a formula for sharing the debt burden, either as grant or in some other way. This way there will be a significant fall in the debt burden of the state,” says Asim Dasgupta, the outgoing state finance minister.
According to Reserve Bank of India (RBI) data, the National Small Savings Fund (NSSF) could be one-fourth of the total outstanding liabilities at the end of March 2011. The share of high-cost debt instruments, like public account items small savings and state provident fund, in total outstanding liabilities has remained in the range of 12.1-12.3 per cent since 2005-06.
Considering the burden arising out of the high effective rate of interest on NSSF loans taken by states till 2006-07, the Thirteenth Finance Commission has recommended interest relief on these loans, with a precondition relating to the enactment of the fiscal responsibility law, a move likely to benefit the new government. Moreover, recently RBI Governor D Subbarao had said there was a need to align the high rates of small savings with market rates, a move that would reduce the state’s debt burden.
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The tweaks in the accounting system, however, would be easier said than done.
“Whether it is the internal debt of the state or the Centre, it will be a debt. Giving it a different name would not change. Any change in formula should be applicable to all states, and not just West Bengal” said Dipankar Dasgupta, professor of economics, economic research unit, Indian Statistical Institute.
Yet, the outgoing state finance minister’s demands are not totally unjustified either.
“Perhaps, Dasgupta has a point because as compared to market borrowings, the cost of small savings is generally higher by one percentage point. The advantage of small savings is the higher repayment tenure,” says V K Srinivasan, former IAS officer, who served the finance and industry Departments in both Andhra Pradesh and Union governments.
From 2002-03, 100 per cent of the net collections (gross collections minus withdrawals by depositors) are being invested by NSSF in special securities issued by respective state governments. Prior to that collections were being shared between states and the Central government in the ratio of 80:20. The debt servicing of special government securities is an income of the fund, while the cost of interest paid to depositors and the cost of management of small savings schemes are expenditure of the fund. The special securities issued by the central government to NSSF constitute a part of its internal debt. However, interest at a rate of 9.5 per cent per annum is payable on the special securities issued by states.
Dogged by high revenue and fiscal deficits, high committed expenditure and debt compared to revenue receipts, West Bengal is nearing a debt trap. As much as 85 per cent of the state’s revenue receipts have to be spent on committed expenditure such as salaries, interest payments and subsidies, leaving little room for expenditure on development projects.