Centre’s current policy for determining central tax share of states ends up penalising small but economically prosperous states like Bengal and must be revised
On 10th February, the West Bengal Finance Minister Dr Amit Mitra has presented, yet again, a pro-people budget for 2020-21 with the clear objectives of boosting the rural sector in general and helping the socioeconomically marginalised sections in particular. Rs 2,55,677 crore budgetary outlay (with a deficit of only Rs 8 crore) has earmarked specific funds for eleven new welfare and development programs for the benefit of its citizens.
In 2019-20, West Bengal's GSDP growth at a constant price is around 10.4 per cent which is double the national average. The state has recorded 12.58 per cent of GSDP growth during 2018-19, the highest among all Indian states. As per the budget document, Bengal has achieved a top position in the country in many important areas, namely 100 days' work; small scale industries; rural housing; minority scholarship; skill development; 'ease of doing business' (EoDB) and e-tendering, those are strongly associated with the livelihood of a large section of its citizens.
The investment climate of the state has also improved substantially which resulted in a 3.1 per cent growth of Bengal industries which is more than five times the current (April-November) industrial growth of the country at 0.5 per cent. During the last eight years, more than Rs 2,43,419 crore has been invested in small and medium industries through the cooperative and commercial banks and around Rs 4.45 lakh crore investment in large industries has been fructified during the previous five years. In addition to this, during the past eight years, an amount of Rs 22,267 crore worth of foreign capital has been invested in the state. Thus a vibrant economy has helped the Finance Minister to manage a huge debt of Rs 2.07 lakh crore, the present government had inherited in 2010-11 and reduce the debt/GSDP ratio from over 39 per cent to less than 33 per cent in 2019-20. The Bengal government, under the leadership of Mamata Banerjee who personally monitors every project through her regular administrative meetings at the district and block levels, has proved that a real turnaround of the economy can be achieved with proper policy initiatives and by remaining focussed on the welfare agenda of the citizens.
This year's budget should not be judged in isolation as it is a continuation of the same welfare centric policies that the government has been following during the last nine years. Bengal, a densely populated resource served state which has suffered from three partitions since 1874 (first was on February 6, 1874, when Assam, including Sylhet, was severed from Bengal to form the Assam Chief-Commissionership) badly needed capital to revive the economy. But instead of running after the big capital, the present state government had relied on its skilled karigars/craftsmen (televaja shilpa) and hundreds of agro-based traditional industries which could be revived with minor intervention and support from the state. All these traditional industries are knowledge-intensive. Simultaneously, the government has also taken major initiatives to make the state an attractive destination for big capital.
Globally, two major approaches are followed by states/ countries to attract investment: (i) Race to the bottom approach and (ii) the beauty contest approach. During last century, most of the countries followed the first approach where developing countries competed, among themselves, in a 'race to the bottom' by offering competitive tax and other incentives on foreign direct investment (FDI) where foreign firms ended up appropriating most of the benefits associated with their investment. For example, in 1997, for agreeing to build a plant in a lightly industrialised area – Rio Grande do Sul of Brazil, General Motor negotiated a subsidy, amounting to $250 million and a tax incentive that has the potential to equal $15 billion, over a fifteen-year period. In West Bengal, the previous Chief Minister's desperate attempt to attract Tata Motor's Nano project to the state was one such example of 'race to the bottom approach'. Tata Motors had abandoned the Singur project in October 2008 to extract huge concessions from the Gujarat government and relocated their proposed plant from Singur to Sanand. Interestingly, Tata Motors followed the same strategy the General Motors had followed in 1997.
It is recommended that as an alternative to this strategy, developing countries should follow the 'beauty contest' approach to attracting capital. This means making the state more attractive by educating its labour force and improving the quality of infrastructure and institutions. It is argued that the education level of the labour force determines the type of capital one receives. A highly educated state will attract quality capital in the high-end sector where knowledge spillover would be higher. Fortunately, the present government of Bengal is pursuing this challenging strategy of attracting capital and is getting rewarded. As investments have started pouring in the unemployment rate has come down significantly (by over 40 per cent) during the last couple of years.
However, high-interest pay-out to the Centre on previous loans and curtailment in central fund transfer had undermined the state's development agenda. While giving out the details, the Finance Minister alleged that Rs 11,213 crore has been reduced on account of devolution to the state, while grants worth Rs 37,973 crore have been denied by the Central government. Moreover, Bengal is not getting its GST compensation as promised. "All put together, Rs 50,486 crore was being denied to the state of Bengal," Dr Mitra said, adding that it was over and above a claim of Rs 38,000 crore that the Chief Minister had raised with the Prime Minister when the two met on January 11, 2020.
State's legitimate share on central taxes has always remained a contentious issue. The 15th Finance Commission (FC) has slightly modified the formula for distributing states' share of central taxes, the largest component of transfers to states. FC's new tax revenue devolution formula relies heavily on the states' population. This, in effect, ends up rewarding the more populous states for being unable to implement family planning measures while penalising states such as Tamil Nadu and West Bengal for having low fertility rates.
It is observed that when it comes to generating tax revenue, the most populous states are not on top, meaning efficient smaller states have to subsidise the larger but less productive northern states. The FC distributes tax revenue among different states on the basis of a formula which has six parameters (with respective weights) namely – tax efforts: rewards states that are able to collect a high amount of taxes in relation to their GDP (2.5 per cent); demographic performance: health, education, gender equity, etc. (12.5 per cent); income distance: a criterion that awards poorer states more money in order to achieve equity across the Union (45 per cent); forest and ecology (10 per cent); area (15 per cent) and the population (15 per cent). States like West Bengal, that are relatively smaller in size and have successfully controlled their population growth, are among the worst sufferers.
Instead of 'size' and 'population' as parameters for devolution, a new efficiency based parameter is strongly suggested so that economically efficient states like Bengal are properly compensated. Let us name it as 'state's economic efficiency index' (SEEI), which is the ratio of the share of the state's GSDP in the total GDP of the country to the share of the state's area in the total area of the country. And it should enjoy a weight of at least 30 per cent in the devolution formulae. Baring a few hilly states, ideally, SEEI score of any major state of India should be 1. States with SEEI scores greater than 1 should be rewarded and states with less than 1 SEEI score should be penalised.
Expressing GDP/GSDP per sq km is not a customary practice while per capita GSDP/GDP/GNP is a common exercise to measure growth. But the former measure should be considered as an important parameter to judge efficient use of a 'geographical space' which is becoming increasingly scarce. These were not scarce resources and were not considered as 'economic goods'. Physical space is very important irrespective of their 'resource endowment'. The land could be barren, sandy, hilly, salty but sheer size of the land can make all the differences. 'Resource endowment' of a geographical space depends on how skilfully that space is utilised for economic gains.
West Bengal has skills and knowledge but it does not have adequate landmass. That is why GSDP per sq km is an important parameter for judging the economic efficiency of the state in question. The attached table suggests that West Bengal, with an SEEI score of 2.17, has the maximum score among ten major states of India and Madhya Pradesh has a minimum score of 0.45. It is high time that Bengal, the most densely populated state of the country, gets its long-deserved recognition and be rewarded for its achievements.
The writer is an academic and economic analyst. Views expressed are strictly personal