The Asian Development Bank has termed the tax administration in West Bengal “inadequate” and has said it contributed to the low tax to GDP ratio, leading on to “fiscal distress”.

In its analysis of the State’s finances in the process of evaluating a $300-million loan proposal, the development bank noted that West Bengal’s “deteriorating fiscal situation” has had negative consequences for the State’s development agenda.

ADB, on Wednesday, accorded ‘concept clearance’ to a proposal for providing the $300-million (Rs 1,650 crore) loan to West Bengal. Another $200-million loan is under evaluation.

ADB has taken note of the “fiscal distress” in the State’s finances, due mainly to “low tax revenue performance”. It notes that the own tax (as opposed to the State’s share of central tax collection) to State GDP stood at 4.6 per cent in 2010-11, against the national average of 7.3 per cent and 9.5 per cent in Karnataka.

“The underlying analysis of West Bengal public finances suggests that the inadequacies of tax administration is one of the most important factors contributing to the low tax to GSDP ratio,” says ADB.

In a telling commentary on the State’s fiscal stress, ADB noted that the committed expenditures of the Government (on salaries, pensions, and interest payments alone) have “almost exhausted” the total revenue receipts of the State in recent years. This has required the State to undertake ever larger borrowings to finance these expenditures, “thereby trapping the State in a vicious cycle of mounting current account (revenue) and fiscal deficits.”

The increase in debt and resulting debt service payments has reduced fiscal space, limiting the ability of the Government to make effective use of public spending to meet its policy priorities. More directly, increasing interest payments has resulted in a large opportunity cost as the disproportionate share of the fiscal adjustment fell on capital spending.

ADB notes that the capital outlay to GSDP in West Bengal has been declining from a low rate of 1.2 per cent of GSDP in 1994-1995 to 0.4 per cent in 2003-2004 and is currently the lowest in India — a 0.8 per cent in 2010-2011.

Accordingly, limited public funds available to finance investment as well as to preserve capital stock through spending on operation and maintenance have had a serious impact on the State’s growth potential, and capacity to improve service delivery.

“Needless to say, these have also had serious implications for manufacturing growth in the State, leading to narrowing of the commercial tax base,” the bank has said.

In a discussion paper put up on its Web site, ADB says that “following the change in the West Bengal Government in May 2011,” there have been discussions on the possible introduction of a comprehensive support programme to bring public finances in West Bengal to a “stable and sustainable path”, and improving development financing in the State.

The discussion for lending to the State was initiated by the Centre’s Department of Economic Affairs in September 2011. The Department requested ADB to hold discussions with the West Bengal Government.

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