Of the provinces which had been subject to the house of Tamerlane, the wealthiest was Bengal – The Ganges, rushing through a hundred channels to the sea, has formed a vast plain of rich mould – the rice fields yield an increase such as is elsewhere unknown. Spices, sugar, vegetable oils, are produced with marvelous exuberance. The rivers afford an inexhaustible supply of fish – (and is) at the same time the chief highway of Eastern commerce. On its banks, and on those of its tributary waters, are the wealthiest marts, the most splendid capitals, and the most sacred shrines of India. The tyranny of man had for ages struggled in vain against the overflowing bounty of nature. In spite of the Mussulman despot, the Mahratta freebooter, Bengal was known through the east as the garden of Eden.
What Lord Macaulay describes with his matchless eloquence as a land of surplus and plenty is starkly different from the today’s Bengal where bounty of nature has indeed succumbed to the tyranny of man. One doesn’t need to look so far in the past: even our earlier generation lived in a state that was earning India’s highest per capita income, and enjoyed in Calcutta educational and employment opportunities that was unmatched in the nation. Since then – over several decades – we have witnessed a secular decline. A recent indicator of how surplus has given way to deficit in West Bengal’s precarious debt situation.
Our debt, over 40% of our state’s GDP debt appears to be more than what we can service. It is worth investigating the reasons that have caused us to come to this pass. Only then can we seek resolution.
The key driver of our state spending is salaries and interest expenses. In fact, 9/10 of our expenses are used to finance salaries and to service interest payments. Government salary expenses are mandated by the central government and the rapid pay rise instituted by the fifth and sixth pay commission has increased expenses for all states, not just for West Bengal. Indeed, all states witnessed an increase of debt to GDP ratio after 1999. The World Bank described the fifth pay commission as the ‘single largest adverse shock’ to the public finance of the nation. However, since 2007-08 – buoyed by the strength of the Indian economy – most states have recovered, bringing the debt down to around a quarter of GDP. West Bengal, unfortunately didn’t enjoy a corresponding uplift. An IMF paper estimates that, on an average, a 10-percentage point increase in debt-GDP ratio decreases the ensuing five-year GDP growth by 0.4 percentage points. Thus West Bengal, by this statistic, is consigned to a slower growth than other states due to our high leverage.
Part of the story is explained by our cost of funds. West Bengal is charged the highest rate of interest in India – and for those inclined to draw parallels with the Euro zone and indebted states in the United States, our cost of funds are much higher than in those economies, thus our ability to borrow is lower. Domestically, the reason our cost of borrowing is high is rather ironic. Almost half of the debt is drawn from National Small Savings loans in West Bengal whose interest cost is higher than other forms of loans. Why does West Bengal then borrow from this source? West Bengal has succeeded in mobilizing more small savers than any other state. Roughly 20 million people in the state of 90 million have small savings accounts. However, the Central Government requires the states to borrow a large proportion from this account and the cost of borrowing is the highest, often 1.5% higher than what the market would lend at. This is certainly unjustified and our state government is right to demand redress.
Thus for the state, other than to urge the center – which the present government is doing from the time it assumed office, the only actionable solution to reduce our debt burden is to increase revenues. This is of course easier said than done. Our own revenues, at 3% of GDP has been worse than any “general category states”. Most states achieve 8%, which is still quite low and reflects federal government policies of retaining most plum tax sources to themselves, but West Bengal’s OTR is less than half of other states – and only federal policies cannot be the reason. What comprises our OTR? Roughly, 4/5th of the OTR is drawn from the Sales tax and 1/5th is from Property tax and stamp duty. Thus the main culprit of low OTR is low sales tax collection. The reasons for such low Sales tax collection in West Bengal need to be studied. There may be leakages in tax collection given the large informal economy. But the main drag is structural: agriculture and allied activities constitute 20% of our GDP and manufacturing activity has reduced to less than 10%. The rest of the state’s GDP is mainly from services. Unfortunately, the state cannot earn revenue from either agriculture or services – agriculture is not taxable and service tax is collected by the center. Thus increase of Sales tax is highly co-related with increase of West Bengal’s manufacturing activities and consumption of manufactured goods – both are languishing.
The contribution from real estate sector to GDP has increased from 6% to 12% in the last 15 years – mostly drawn from Stamp duty and Property tax – which has been one area where revenues have been relatively buoyant. However, given the state of our finances we must redouble our efforts on manufacturing industry, which will not only employ our large young population but also hopefully turn the tide and return West Bengal to better economic health.