TAKING STOCK: Bhattacharya wants interest rates on Central loans reduced

Financiers love Government servants. They are quick to settle their dues, never renege on commitments and seldom give cheques that behave like rubber balls. In short, they make for safe borrowers. That's the rule. West Bengal is the exception. The state, where over a million people enjoy the comforts that come with being on the Government's payroll, is facing a financial crisis due to its enormous wage and pension bills and burgeoning interest costs. And salaries of government servants have started coming in late.

The Left Front Government has not defaulted on payment to staff yet, but most employees have not been paid their arrears after the pay hikes suggested by the Fifth Pay Commission in 1998. And the paydays of almost four lakh school teachers of government-aided schools have been pushed to the last week of the month.

With the puja buying season barely two months away, most consumer finance companies are now asking school teachers who seek loans to furnish extra security, like proof of fixed deposits in bank. A.K. Agarwal of Positive Electronics in Kolkata says, "We are a bit cautious this time because there is a new risk to the state Government's salary commitments."

The risk was evident in March this year when the Government directed its treasuries not to release more than Rs 40 crore a month for payment of salaries. The order put a question mark on almost 95 per cent of the government's Rs 950 crore monthly salary bill. For a long time, the state Government has virtually excused itself from all development work and used tax receipts and borrowings to pay salaries and interests. How long can it continue to do so is doubtful now.

Delayed salaries are only the tip of this iceberg. As early as 1981, the Left Front government committed "death-cum-retirement benefits" to school teachers. Now, with 40,000 retired teachers milling around the corridors of the pension department for pension and gratuity not yet paid, or proceeds of pension sale not handed over, the benefit has lost its revolutionary sheen. There have been numerous instances where the beneficiary of the death benefit also passed away waiting to be paid.

SPENDTHRIFT: Government expenditure ballooned out of proportion under Dasgupta

The state's monthly wage bill is Rs 950 cr. In March this year, the Government told its treasuries to release only Rs 40 cr a month. Most employees yet to get arrears after salary hikes recommended by Fifth Pay panel in 1998. The state's internal debt rose from Rs 3,480 cr in 1996-97 to Rs 20,645 cr in 2000-1.

Significantly, it is Chief Minister Buddhadeb Bhattacharya who has brought the issue to the fore. At a recent meeting of the core committee of the state Cabinet, he bluntly confessed that the Government had of late been forced to appropriate funds deposited with the Rent Controller's office (as rent of disputed tenancies) to meet its salary obligations. "I am not sure if the payment commitments of the government can be honoured this year if the interest rate on Central Government loans is not reduced by at least 2 per cent," he says.

State Finance Minister Asim Dasgupta, an economist who trained at MIT and was a favourite of former chief minister Jyoti Basu, has good reasons to feel uneasy. In charge of the finance portfolio for 15 years, it is during his tenure that the revenue expenditure of the government ballooned while the tax receipts fell far short of target. Towards the end of Basu's tenure, Dasgupta had gone on a window-dressing binge. He borrowed from the market ostensibly to finance infrastructure projects in West Bengal but in reality-as the Comptroller and Auditor General's recent reports have pointed out-used the money to meet the state's revenue shortfalls.

In fact, Dasgupta has been feeling the heat since Bhattacharya took over as chief minister in October 2000. He has been lobbying with other state chief ministers for a host of Central concessions, notably for assistance to meet half of the incremental salary obligations due to the Fifth Pay Commission awards and for lessening the burden of plan loans on the state by scaling down the present interest rate of 12 per cent to around 8 per cent. A committee of state finance ministers presided over by Union Finance Minister Jaswant Singh will make a set of recommendations next month which may address the problem of the steep interest rate on loans and the mounting salary bills, the double-whammy that has affected not just West Bengal but many other states.

"It is a Centre-state joint effort to find a solution to the states' acute financial problems," says Dasgupta. Meanwhile, he has shown exemplary alacrity in managing the Government's only source of ready cash-its account with the Reserve Bank of India (RBI). The RBI sets a minimum balance and a maximum borrowing limit for every state depending on its financial health. If the state overdraws on a particular day as a ways and means advance or as overdraft, it must return the excess amount latest by the twelfth day or face cancellation of all future loan requests. A profligate West Bengal has often overshot the borrowing limits. Bhattacharya told India Today, "Thank God we are maintaining our borrowing limits, even though often by repaying in the last hour of the eleventh day."

The state, as the CAG found out, resorted to such desperate recourse for 360 days in 2000-1. So far this year, hardly a day has passed without the state's RBI account being blocked for beyond-limit borrowing.

Worried that the state's finances are on the verge of collapse, Dasgupta is bending over backward to prove that the malaise of West Bengal is not unique. He blames the Central Government for the financial mess that some states are in. The argument may soon be challenged within the ruling CPI(M), with the chief minister having set up a three-member committee on expenditure headed by economist Amiya Bagchi.

The committee will obviously scrutinise the reasons underlying some of the worst financial hiccups between 1996 and 2001. The total liabilities of the Government (internal debt, loans and advances from the Centre and liabilities due to small savings, Provident Fund) grew 156 per cent to Rs 54,119 crore during this period, mainly because of a staggering 493 per cent increase in internal debt. This includes borrowings through the West Bengal Infrastructure Development Finance Corporation, a special purpose vehicle to raise funds for building roads, bridges and houses.

The CAG found that the bulk of the funds raised by the corporation through the issue of bonds and loans under the approved market borrowing programme had been parked at the Pay and Accounts Office for onward transfer to the government as "Internal Debt-Loans from WBIDFC". "The state obviously created the WBIDFC," comment the auditors, "as a new vehicle of borrowing to fill its depleted coffers." The upshot: a quarter of the revenue expenditure goes towards interest payment while only 5 per cent of government spending is used under the capital head.

As a result, in March 2000 West Bengal's debt and guarantee were almost four times its revenue receipts. Only one state-Punjab-has perhaps gone a bit further than West Bengal into the jaws of a debt trap. But the nature of their profligacy is different. While Punjab has borrowed heavily to shower freebies on its farmers-including free electricity-its citizens have done well for themselves. In 1999-2000, the poverty ratio in the state had dropped to a mere 6.6 per cent.

In stark comparison, more than 30 per cent of West Bengal's population is still poor, showing the futility of a policy to pamper an army of middle-class salaried people at the cost of development.