For West Bengal finance minister Asim Dasgupta, presenting the state Budget has become somewhat of a habit. He has been finance minister of the communist-ruled state since 1987.
Yet, when the Harvard-educated minister rises to present the vote-on-account tomorrow, he will probably have some apprehensions. West Bengal is the third most indebted state in the country, according to the Reserve Bank of India.
West Bengal's debt burden has increased to Rs 1,92,000 crore, against Rs 1,48,110 crore in 2008-09, a 29 per cent rise over the previous year. Dogged by high revenue and fiscal deficits, high committed expenditure and high debt compared to revenue receipts, the state is in a debt trap.
Yet, last year Dasgupta made a bold statement when he said the state government would adopt the central government’s FRBM (Fiscal Responsibility and Budget Management) Act with effect from 2011-12. The FRBM Act of 2003 had specified that borrowings should only be done for capital expenditure and mandated a fiscal deficit of three per cent of SGDP (the fiscal deficit) after 2008-09. In the case of West Bengal, around 85 per cent of revenue receipts have to be spent on committed expenditure such as salaries, interest payments and subsidies, leaving little room for expenditure on development projects.
Most of the money for these expenses come from borrowing. The state’s fiscal deficit to GSDP ratio was 4.38 per cent as in March 2009, against 4.15 per cent the previous year. Clearly, when the next government presents its Budget, managing the finances of the state with the FRBM provisions in would be a challenge.
The state is going for legislative assembly polls in six phases, starting April 18. Amit Mitra, former secretary-general of FICCI is spoken as the opposition Trinamool Congress' choice for finance minister. A Padma Shri awardee, Mitra's list of achievements is long, but the job in West Bengal might be the most challenging yet.
Finding the money
“In the short run, it will be extremely difficult for the government to manage the state finances with FRBM in place. On the one hand, debts are high; on the other, the revenues are low,” points out Abhirup Sarkar, economist and professor of economics, Indian Statistical Institute. Thus, the government is likely to stress on increasing revenue in the medium term by plugging gaps in tax collections.
“There are a large number of traders who do not pay tax. They need to to brought in the tax net. Also the state is located in a strategic position due to the trade route to the northeast. That area can be tapped for tax collections,” said Sarkar.
The recommendation of the fifth Pay Commission, pertaining to increased salaries of government employees, has further dented state finances. Last year, in his Budget speech, Dasgupta had mentioned the “difficult task” of bearing expenditure on account of pay revision of employees.
According to a report by Care, the credit rating agency, West Bengal's revenue deficit increased to Rs 23,050 crore in 2009-10 (revised estimates), against Rs 9,840 crore due to the recommendations of the Fifth Pay Commission. The high revenue deficit resulted in a larger portion of incremental borrowing being used to finance revenue expenditure, says the Care report.
The state's revenue deficit to gross fiscal deficit increased to about 84 per cent in 2009-10 (revised estimates) from 73 per cent in the previous year. Committed expenditure (salary, pension and interest expenditure) formed 112.4 per cent of the revenue receipt.
“The implementation of the fifth pay commission has meant almost two-fold pressure on government finances. Besides pressure due to revised pay scale in FY10 (entailing additional Rs 5,400 crore in salary and pension at revised rates), the additional pressure of outstanding arrears pertaining to FY09 to the tune of Rs 4,600 crore is also felt,” says the Care report.
Notably, the state's capital receipts grew at a compounded annual rate of 35.4 per cent in 2007-10, with a substantial rise in borrowing, the report says. National Small Savings Fund receipts and internal debt formed 79 per cent of capital receipts for the state government, the Care report says.
