Bankrupt after 29 years

The Left Front government first came to office in West Bengal in the summer of 1977, and has won five subsequent elections, all by a landslide. No other state government in India has been in office for such a continuous period. Fresh elections have been called, and in the coming weeks of campaigning, many claims will be made about performance over the past three decades. So the Comptroller and Auditor General's latest report on the state government's finances (for 2004-05) has come out at a useful time, and should provide a reality check.

The first and most interesting point to note is that the interest paid on accumulated state debt (Rs 9,767 crore) is virtually equal to the total tax revenue collected by the West Bengal government (Rs 9,924 crore). The second is that the government's bill for salary and pensions (Rs 13,137 crore) eats up much more than the rest of the money that is available, namely funds received from the Centre under various heads and non-tax receipts (Rs 10,741 crore). We therefore have a variation of Lincoln's definition of democracy: government of, by and for its own employees.

The starting point, therefore, is that even before the state government undertakes any programme activity, it is already in deficit to the tune of over Rs 2,500 crore. The result of the consequent fiscal squeeze is that total expenditure by the government (not counting interest payments) has grown by barely 7 per cent over the past four years""which is much less than the rate of inflation. In areas like medical and public health, irrigation and flood control, and transport, expenditure has shrunk in even absolute numbers over the last four years. In other words, the size of government activity has been shrinking. We are witnessing a withering of the state in a very non-Marxian sense.

This is the result of patent financial mismanagement. The state government borrows at an average interest cost of 10.08 per cent, and lends at an average interest on loans of no more than 2.84 per cent. The difference in the rate of interest paid and received is 7.24 percentage points, and the loss is a couple of thousand crore rupees. West Bengal is among the most indebted states in the country, which is the reason why interest payments eat up the state's all tax revenue. Indeed, interest payments have climbed 83 cent in four years, while (as already noted) other government expenditure has been relatively flat. This situation will get worse because more than three-quarters of the net borrowings each year are used to pay for current consumption, and therefore not used to build repayment capacity. As a result, the state's fiscal liabilities too have been growing rapidly""and are no longer covered by its financial assets. This is even before counting the state government's contingent liabilities (on account of various guarantees given) and future pension payment obligations.

It is hard to describe this overall situation as anything other than a fiscal disaster. The level of accumulated debt and annual interest payments represents past sins. The government is now too financially constricted to be spending much on development. And this situation is worse in West Bengal than in almost any other large state in the country. The debt swaps arranged by the Centre and the award of the 12th Finance Commission may have provided some relief in 2005-06, but if the state does not get its act together, West Bengal is certain to slip in the national rankings on almost any developmental parameter you can name, and irrespective of which party is returned to power by voters.