Quite irrespective of the parties that are voted to power today, the new occupants of Writers’ Building will surely be concerned during their term with issues concerning the social sector and law and order. However, the major focus must necessarily shift to the economic arena and, in this context, there little choice before the new Government but to embark on a path of large scale industrialization. This is not to suggest that small and medium enterprises should be ignored, but most politically neutral economists would probably agree that rapid industrialization is the only tool available to restore a semblance of credibility to Bengal’s crumbling finances.
For simplicity, a state’s finance may be likened to that of an individual. The latter earns a regular income each month and undertakes a set of common expenditures, broadly classified as consumption. These could involve payment for children’s schooling, food, electricity and other necessities. If income exceeds consumption, one ends up with positive savings. Over time, the accumulated savings, backed up by loans, are used for asset accumulation, such as a house or a car purchase. The lenders happily accommodate borrowers who have funds of their own and are borrowing with an eye towards asset creation, for the asset itself can be mortgaged to the lender as insurance against default.
On the other hand, a person who consumes more than what his regular income permits must also end up borrowing. However, these borrowings do not create marketable assets and often lead to bankruptcy for the borrower, since assets do not match liabilities. The lender too could end up in bankruptcy if he had loaned out of borrowed funds.
As in the case of individuals, the state too has a regular flow of earning and expenditure, recorded under what is called a Revenue Account. Revenue earnings for a state involve its tax proceeds, its share in Union Government taxes, a number of non-tax revenues arising from the provision of services and finally direct grants from the Centre. Revenue expenditures are divided up into several compartments, of which two large segments consist of committed salary payments (often called public consumption) for Government employees and interest on past loans. The excess of expenditure over earning is the Revenue Deficit. A positive deficit emerges when the state turns spendthrift. A negative deficit indicates a surplus left over for non-consumption use.
Over and above its expenditure in the Revenue Account, a state normally spends on physical asset creation, such as power plants, roads, hospitals and schools. Further, it can pay off old loans and create new financial assets by giving out new loans. Revenue earnings too are augmented by receipts such as loan repayments by the state’s debtors. When the revenue plus non-revenue expenditure exceeds the revenue plus non-revenue incomes, the state ends up with a positive fiscal deficit, to balance which it must necessarily borrow from the Central Government, the RBI, the markets and so on. In other words, the positive fiscal deficit is identically equal to the loans incurred during a year, a part of which might even pay off previous loans.
Except under unusual circumstances, the fiscal deficit exceeds the revenue deficit and when the revenue deficit is a large fraction of the fiscal deficit or loans, the state is borrowing not to build assets but primarily to cover its revenue deficit. If a state continues to behave in this manner over a long period of time, it accumulates a large debt without commensurate increase in assets, thereby denying itself asset based earnings out of which debts may be repaid in future.
How did Bengal perform during the Left rule judged from this point of view? It is a much advertised fact that its accumulated debt stands close to Rs. 2 lakh crore. The graph shows how the deficits were nurtured year after year to add up to this monstrous figure. For 28 years beginning 1980-81, West Bengal’s ratio of revenue to fiscal deficit remained positive each year and, despite fluctuations, had shown a rising trend. Worse, in the years 1983-84 and 2008-09, the ratio was hovering around unity, indicating that loans were used to cover extra revenue expenditure alone. As opposed to this, the rest of the Indian states put together displayed a reverse behaviour since 2001-02. The ratio in question even turned negative around 2005-06, implying that many of the states had surpluses in the revenue account, which, added to the loans undertaken, helped them build earning assets.
Thus, even if other states have incurred large loans too, these are qualitatively different from Bengal’s loans, which are backed by few earning assets. And no asset is larger for a state than a large, functional industry. It is only the Union Government that has behaved the same way as West Bengal. However, even the Union displayed a large dip in the ratio starting 2004-05 indicating the adoption of the Fiscal Responsibility and Budgetary Management Act (FRBMA). The Act requires a reduction in the Revenue Deficit and all states, other than West Bengal and Sikkim, adopted the FRBM norm too. The sub-prime crisis made things difficult once again following 2006-07, but this was an exception to the rule. On the other hand, West Bengal’s budget estimate, even for the year 2011-12 (not shown in the graph), posted a value of 0.74 for the fundamental ratio. Since then, of course, the Government passed the FRBM Law, but it is the Government to be sworn in a few days from now that will need to bear the dubious burden of its implementation.
What then should the new Government’s financial agenda be? First, the Revenue Deficit must contract and this will call for an increase in revenue, instead of the near impossibility of a decrease in committed expenses. West Bengal’s performance in the collection of taxes has not been exemplary. For example, the budget estimates for 2009-10 reveal this figure to be Rs. 19,476 crore, whereas, for Maharashtra it was Rs. 50,986 crore, for Andhra Pradesh Rs. 40,664 crore, for Tamilnadu Rs. 38,578 crore, for UP Rs. 33,456 crore and so on. Bengal’s non-performance on the tax front is partly explained of course by corruption, but a far more important explanatory variable is the near absence of industrial revenues worth naming.
Since industries cannot be built overnight, can the Government hope for a bail out from the Centre? The state has a share in the Central taxes, which the Thirteenth Finance Commission (XIII FC) has recommended to be 7.379 per cent for Service Taxes and 7.264 for other shareable taxes for the period 2010-11 through 2014-15. It does not appear that there is room for manoeuvrability here. As far as state specific Central Grants go, the XIII FC suggests a phased structure for the years 2011-12 through 2013-14. West Bengal has been allotted Rs. 425.75 crore each year, though, depending on circumstances, all states have been allowed to request for need dependant changes in the phasing. Quite likely, the new Government will resort to this provision.
Occasional bail outs alone cannot, however, rescue us from our severe financial crisis. Small and medium scale industries will generate employment, needless to say. Depending on the election results, the Railways too could turn employment- friendly. However, the magic potion that will guarantee employment as well as continuous revenue flows is known as industrial growth. One suspects though, that given the Singur history, substantial private investments will be hard to come by. Besides, some still argue that farmers will never agree to part with their ploughs to attend to factory machines, even as they migrate willingly to Gujarat to polish precious stones! One hopes that the new Government will appreciate the absurdity of such arguments and allow industry to flow freely into West Bengal. No Government can continue to be financially strong and politically powerful anywhere in India by turning a blind eye towards industry.
[This is an expanded version of an article pulbished by The Telegraph, Calcutta on March 14 under the title Two Lakh Crore and Counting.]