West Bengal’s Finance Ministry has decided to withhold payments for a while. The rate of VAT stands increased by 1 per cent, thereby raising hopes that in the near future expenditures will resume. The Government is silent on the nature of expenses that are being kept in abeyance. This lack of transparency makes it difficult to assess the extent of the problem.
According to a report published by the Reserve Bank of India in February, 2010, we cannot isolate West Bengal alone for financial mismanagement. Entitled State-Wise Analysis of Fiscal Performance, it starts off on an overall negative note: “An analysis of the States’ budget documents indicates inadequate fiscal transparency across the States.” Unfortunately, it is not easy to lay one’s hands on most of these budget documents. However, the extent of confusion is quite clearly borne out by West Bengal’s own budgetary exercise for 2010-11.
The Finance Minister’s budget speech for 2010-11 states: “total expenditure … taking plan and non-plan expenditure together, will stand at Rs. 76,432.07 crore ... the total receipt … will be Rs. 76,318.07 crore … if the proposals for receipt and expenditure are collected together, then an initial deficit of Rs. 114.0 crore emerges.” In terms of standard budgetary parlance, the statement is obfuscating. It is normal practice to refer to total receipts as the sum of revenue and capital inflows and expenditures as the sum of revenue and capital outflows. The deficit, computed as the difference between revenue and capital expenditures and receipts turns out to be Rs. 22,832.12 according to the government’s own estimate in the Budget at a Glance document. The enormous difference between this figure and the one quoted by the Budget Speech is unexplainable to say the least.
Going back to the RBI report, “During 2008-09, Bihar registered the highest revenue surplus of 3.0 per cent of gross state domestic product, followed by Madhya Pradesh (2.0 per cent ...), Chhattisgarh (1.3 per cent ...) and Uttar Pradesh (1.1 per cent ...). The revenue surplus of higher order in these States would help them to finance their investment projects without accelerating their outstanding liabilities ... West Bengal registered the highest revenue deficit of 3.7 per cent of GSDP ... the perpetual deficit in the revenue account compelled (it) to divert the funds from capital account to finance revenue deficit.”
To illustrate this fiasco, let us present the relevant figures for the current year. According to the budget estimate, interest payments, salaries, pensions and subsidies will constitute 69 per cent of the state’s revenue expenditure. Adding on the remaining 31 per cent of the expenditure, the revenue receipts fall short of expenditures by Rs. 16,819.32. To meet this deficit, the government plans to borrow Rs. 27,721.83, which is 96 per cent of its total capital receipt of Rs. 28,751.70. It has diverted a part of the capital account to meet the revenue deficit. In fact, in the 2010-11 budget, it is supposed to spend 58 per cent of the capital surplus (generated mainly through loans) to meet the revenue deficit. Thus, money that should be raised for capital augmentation is being used up mostly for paying salaries, subsidies and interest.
There is little point in going back to earlier years, since the scenario was more or less the same, including totally abstruse budget speech claims. The current year has a special significance of course, given the upcoming election. To keep the populace as happy as possible, the government has announced a number of sops and this has obviously put severe pressure on the budget. How it will keep its creditors at bay (including salary and pension earners?) is anybody’s guess. If the Central government pays off the coal royalty, the pressure could ease, but no one knows how much expenditure the government is committed to. The Finance Minister stated to the media that unnecessary Plan expenditure should also decrease. Since funds from the Plan account cannot be diverted to the non-Plan account by law, this statement is yet to be explained. What is worrisome is that salaries are paid out of the non-Plan budget.
Let us end up though with a note of hope in the RBI report. “The total revenue receipts of ... States increased in 2008-09 (RE) over 2005-08 (Average) ... (In) a majority of the States the increase is more due to Central transfers and less due to their own efforts. Only West Bengal is the exception, where the increase is more due to own efforts and less due to Central transfers.”
Right now, unfortunately, Central transfers appear to be the only solution to our problem.