Next Bengal govt to inherit huge debt

A high revenue deficit, high expenditure and spiralling borrowings are what Mamata Banerjee is likely to inherit if she is voted to power in the 2011 assembly elections in West Bengal.

The state's debt burden increased to Rs 1,92,000 crore (Rs 1,920 billion), against Rs 1,48,110 crore (Rs 1,481.1 billion) in 2008-09 -- a rise of about 29 per cent -- state Finance Minister Asim Dasgupta told the Assembly recently.

The state's ratio of debt to the gross state domestic product as on March 2009 stood at 47.67 per cent, compared to 48 per cent in 2008-09.

West Bengal is not the only state to have clocked such a mind-boggling figure.

Uttar Pradesh had a loan burden of Rs 2.21 lakh crore or Rs 2.21 trillion (with debt to GSDP ratio close to 50 per cent, according to revised estimates for 2008-09) and Maharashtra Rs 2.08 lakh crore or Rs 2.08 trillion (debt to GSDP ratio of 26 per cent, as on March 2009).

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There is, however, one difference that makes West Bengal's problem more complicated. About 85 per cent of revenue receipts have to be spent on committed expenditures like salaries, interest payments and subsidies, leaving little room for expenditure on development projects.

The 12th Finance Commission had recommended a debt-GDP ratio of 30.8 per cent to be achieved by states as at the end of March 2010.

On an average, from the peak level of 32.8 per cent as at the end of March 2004, the debt to GDP ratio of state governments came down to 26.2 per cent in 2008-09 (revised estimates), according to recent Reserve Bank of India report on state finances.

The new government's hands will be further tied if the current state finance minister, Asim Dasgupta, fulfils his commitment to introduce the Fiscal Responsibility and Budget Management Act with effect from 2011-12.

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West Bengal happens to be one of the two states that have not adopted the Act so far.

The other one is Sikkim.

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.

"The state government has outstanding debt of close to Rs 2 lakh crore. It also has interest on outstanding debt through fresh loans. The FRBM Act will definitely put restrictions in it," Abhirup Sarkar, economist and professor of economics, Indian Statistical Institute, said.

The state would have to grope with resource crunch if the Act was enacted, analysts tracking state finances said.

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The government's interest payments went up to Rs 12,740 crore (Rs 127.4 billion) in 2008-09 from Rs 9,767 crore (Rs 97.67 billion)  in 2004-05 -- a growth of over 30 per cent.

Rise in expenditure on pensions over last year (2007-08) was nearly 11 per cent, while it was 71 per cent due to subsidies, the Comptroller and Auditor General's report said.

According to a report by rating agency Care on West Bengal government's bond issuance, interest expense formed about 32 per cent of revenue receipts, and committed expenditure was 77 per cent of the revenue receipts in 2008-09.

The total outstanding liabilities of the state grew at a compounded annual growth rate of 8.3 per cent during 2005-06 to 2008-09 (revised estimates), mainly on account of substantial increase in internal debt and loan against NSS Fund, which grew at a CAGR of 18.1 per cent and 6.1 per cent, respectively, according to the Care report.

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Revenue deficit, which was to be eliminated by 2008-09, stood at Rs 14,709 crore (Rs 147.09 billion), against Rs 8,147 crore (Rs 81.47 billion) in the previous year -- an increase of almost 80 per cent.

The revenue deficit to GSDP ratio, thus, increased to 4.76 per cent for the year ended March 2009, against 2.96 per cent in the previous financial year, according to the CAG report for the year ended March 2009.

The 12th Finance Commission recommended reducing fiscal deficit to three per cent of GSDP.

However, fiscal deficit was Rs 13,558 crore (Rs 135.58 billion), against Rs 11,400 crore (Rs 114 billion) in the previous financial year, and a normative target of Rs 9,278 crore (Rs 92.78 billion) according to the yardstick.

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.

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The state government's market borrowings, which stood at Rs 4,019 crore (Rs 40.19 billion) in 2004-05, jumped to Rs 10,740 crore (Rs 107.4 billion) in 2007-08 -- a growth of 167 per cent.

It further increased by seven per cent in 2008-09, compared to the previous year, representing 85 per cent of the fiscal deficit, according to the CAG report.

West Bengal's tax revenue for 2008-09 stood at Rs 14,419 crore (Rs 144.19 billion), short by 38 per cent as compared to the normative projections of Rs 23,281 crore (Rs 232.81 billion) by the 12th Finance Commission.

Interestingly, the states non-tax revenue of Rs 4,966 crore (Rs 49.66 billion), on the other hand, was higher than both the TFC projections (Rs 3,360 crore or Rs 33.6 billion) and state budget projections (Rs 1,770 crore or Rs 17.7 billion).

The CAG report has pointed out that the figure of non-tax revenue was inflated by Rs 3,240 crore (Rs 32.4 billion) as book adjustment, without actual flow of revenue.

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"One of the long-pending demands of the state government is to increase the share of small savings to 50 per cent. If this is done, it may help the state government in managing finances.

"Over the last few years, the state's dependence on national small savings fund has been on the rise, but the source has also dried up, increasing states' dependence on market borrowing," Sarkar said.

The West Bengal Infrastructure Development Finance Corporation, wholly owned by the state government, was promoted in 1997 as the nodal infrastructure financing agency for infrastructure projects, and also for arranging negotiated loans for part financing the annual plan of the state government.

"WBIDFC came into existence to finance infrastructure, but effectively its role is now deficit financing for the government," said an analysts tracking state finances.