West Bengal's Rising Revenue Expenditure Sparks Worry Over Fiscal Health and Growth

West Bengal's fiscal landscape in the first half of FY25 has raised alarm bells among policymakers and economists, as revenue expenditure has notably outpaced capital spending. According to a recent report by the rating agency CareEdge, the state has witnessed a 13.5 percent year-on-year surge in revenue expenditure, while capital expenditure lagged at a mere 7.7 percent growth. This discrepancy poses significant concerns regarding the state's financial health and its ability to invest in critical infrastructure, a trend that is not unique to West Bengal but resonates across other major Indian states as well. Amit Mitra, who serves as the principal chief advisor to Chief Minister Mamata Banerjee and plays a pivotal role in the state's finance department, highlighted the trajectory of West Bengal's capital spending. Since FY 2010-11, capital expenditure has escalated from Rs 2,226 crore to a substantial budgeted amount of Rs 35,865.55 crore for the current fiscal year. Despite this growth, the current figures indicate a troubling imbalance that threatens to undermine long-term economic stability. The CareEdge report elaborates that the top 20 states in India collectively utilized 41.5 percent of their budgeted revenue expenditure in the first half of FY25, a slight increase from the 40 percent utilization in the same period last year. This robust revenue spending can largely be attributed to various electoral promises, including initiatives like freebies, income assistance, and loan waivers, which have become common in many states as governments seek to secure voter support. However, the implications of this growing revenue expenditure are concerning. West Bengal's fiscal deficit has reached 3.7 percent of its Gross State Domestic Product (GSDP), surpassing the 15th Finance Commission's recommended ceiling of 3 percent. This positions the state among the higher fiscal deficit brackets in the country, further complicating its fiscal challenges, which are exacerbated by sluggish capital expenditure growth. The report indicates that while the aggregate fiscal deficit for the top 20 states averages around 2.9 percent of GSDP, West Bengal's figure highlights a need for urgent recalibration to address its financial sustainability. The sluggish capital spending is particularly alarming, as it raises critical questions about the state's capacity to foster infrastructure development necessary for long-term growth. On a broader scale, the analysis of state finances for the first half of FY25 reveals a mixed bag of performances among the country's major states, which together account for a staggering 93 percent of India’s GDP. Though revenue expenditure is on the rise, the underwhelming capital expenditure raises red flags concerning the future of infrastructure and economic progress. Turning to central finances, the early months of FY25 have not been particularly encouraging either. The Centre's fiscal deficit was recorded at Rs 7.5 trillion, representing 46.5 percent of its budget estimate during the first seven months. While tax collections have remained steady, capital expenditure has not picked up at the anticipated pace, partly due to the political implications of the general elections that occurred during the first quarter. As the fiscal year progresses, there is cautious optimism that capital expenditure might increase in the latter half, but experts warn that the ratio of capital to revenue expenditure is likely to remain below the budgeted levels for FY25. The ongoing fiscal challenges faced by states like West Bengal underscore a pressing need for a strategic overhaul in planning and spending to secure a more sustainable economic future.