While browsing through an old diary, I came across an entry dated October 29, 1970: “Watched Satyajit Ray’s film Pratidwandi (The Adversary). Came out of the movie hall in a pensive mood.” That was because, like the story’s protagonist, potential graduates like me were also facing an uncertain future. West Bengal was under President’s rule, racked by an internecine conflict with the Naxalites. Far from attracting new investment, companies were either retrenching workers or leaving the state, further swelling the ranks of the unemployed. When I left India for the United States in January 1972, the state was still under President’s rule. As absence made my heart fonder, I continued to follow India’s economic and political developments. By all accounts, West Bengal was relatively peaceful and stable under five years of Congress rule. Then, in 1977, a Left Front government led by the Communist Party of India (Marxist) leader Jyoti Basu, came to power in a landslide victory. But, its pro-labour policies soon descended into labour militancy as workplace shutdowns – “bandhs” – and picket lines organised by various labour unions (“gheraos”) ruined the state’s business climate. After 23 years of CPI(M) rule, deteriorating economic conditions set the stage for a change in leadership in 2011. That was when the Trinamool Congress (TMC) led by Mamata Banerjee swept to power. Unfortunately, instead of an economic revival, West Bengal’s per capita income continued to decline relative to those of other large states (Chart 1).A recent government report noted:“West Bengal, which held the third-largest share of national GDP at 10.5 % in 1960-61, now accounts for only 5.6 % in 2023-24. It has seen a consistent decline throughout this period. West Bengal’s per capita income was above the national average in 1960-61 at 127.5 %, but its growth failed to keep pace with national trends. As a result, its relative per capita income declined to 83.7 % in 2023-24, falling below that of even traditionally laggard states like Rajasthan and Odisha.” Source: Based on data in Relative Economic Performance of Indian States: 1960/61 to 2023/24, Economic Advisory Council to the PM, September, 2024. The two series are % share of West Bengal’s (i) GSDP in total GSDPs of all states and (ii) per capita net state domestic product (NSDP) in net national income (NNP) of India.In fact, according to the report, the state’s relative per capita income today is lower than what it was under the Left Front government. This is not surprising given that the TMC found it difficult to shake off the same anti-business image which helped bring it to power (although of late, it seems to be having a change of heart). After all, in 2008, when the TMC was in the opposition, it spearheaded the protests against Tata Motors’ bid to acquire land in Singur. In 2016, the Supreme Court essentially supported the TMC’s position that 997 acres of agricultural land were illegally acquired to build the factory and ordered that the land be returned to the rightful owners. Nevertheless, the fact remains that poor economic performance under the Left Front government dealt the TMC a weak financial hand. The two are often intertwined. So, we were not surprised to see a strong correlation between the ranking of states by economic performance in the EAC report (Conclusion, page 17) and NITI Aayog’s ranking of state fiscal health (Fiscal Health Index 2025; henceforth FHI 2025). How does the link operate? The western and southern parts of India which have performed significantly better than the eastern part of the country in terms of per capita income (see the EAC report), also happen to be relatively more industrialized and less agrarian. This means they tend to have a larger share of formal sector employment. So, we should expect them to be better at revenue generation compared to eastern states where the informal sector is likely to be larger. Further research on this issue is warranted. If good quality data on formal sector employment by state is lacking, we could use two proxies for its size – direct income taxes and corporate taxes as shares of the state’s own tax revenues. The struggle for fiscal prudence An immediate challenge facing the TMC was to avoid racking up even larger fiscal deficits and debt from those it inherited. As it turned out, the TMC not only succeeded in doing that but, barring the period impacted by the COVID-19 pandemic, actually brought the deficit down (see, Medium-term Policy Statement). The data show that at the end of the Left Front’s rule, the fiscal deficit stood at Rs 19,534.96 crores (4.24% of the Gross State Domestic Product, GSDP); this was gradually reduced to around 3.0 % of GSDP by 2018-19. However, when economic conditions were adversely impacted by the pandemic, the deficit climbed to 3.91 % of GSDP which was again successfully reduced to 3.26 % of GSDP by the end of 2022/23 (Table 1). Table 1. West Bengal’s Relative Economic Decline, 1960/61-2023/24 (in % as noted in footnote)Source: Medium-Term Fiscal Policy Statement & Fiscal Policy Strategy Statement for 2024-25, Finance Department, Government of West Bengal, February 8, 2024. 1) The fiscal year runs from April 1 to March 31 of the following year. 2) The fiscal deficit figures are taken from the Auditor General, West Bengal and include ex-post accounting adjustments on expenditures and revenues; hence, they do not equal the ex-ante fiscal deficit implied by total expenditures minus total revenues shown in the table. 3) Revised estimate. 4) Budget estimateAs a result, West Bengal’s debt and interest payment burdens also declined. Debt to GSDP declined from 40.65% at the end of the Left Front’s rule to 37.08% by the end of fiscal year 2023-24. It is projected to ease further to 36.88% by the end of the next fiscal year – a welcome trend which runs counter to the post-pandemic experience of many states around the world. In the wake of this reduction in the debt burden, the state’s interest payments declined from 58.77 to 46.64% of total own revenue (TSOR) between 2010-11 and 2022-23. This payment burden is expected to further ease to 41.66% of TSOR by 2024-25. While the debt burden has been on a declining trend, it is still high relative to most other states. However, there is no evidence that West Bengal’s debt burden is “growing” (FHI 2025, page 21). On the contrary, the debt burden has been declining – it was lower at the end of 2022-23 (37.5% of GSDP) than it was in 2010-11 when the TMC came to power (40.65% of GSDP; Medium-term Policy Statement, pg. 19, and Table 1). Nevertheless, notwithstanding the decline in the deficit, debt and interest burdens, the state’s overall fiscal health remains vulnerable for two reasons. First, the deficit is expected to deteriorate over the next two years to 3.63% of GSDP. These imbalances between expenditures and revenues are well above the 3 % of GSDP ceiling set under the Fiscal Responsibility Legislation (see, Chart 2 and Growth Convergence and Public Finances of India and its States, Section IV, Policy Implications and Conclusion, IMF Working Paper No. WP/24/235, November 2024). The ceiling on imbalances acts as a guide to fiscal prudence given that India’s consolidated central and state government deficits (averaging 9.2 % of GDP in the last three years ending 2023/24), is already high (India: 2023 Article IV Consultation, Table 5, pg. 43, IMF Country Report No. 23/426, December 2023).Second, the state’s own tax revenues barely rise due to an increase in the GSDP (or, total income). Normally, tax collections should be buoyant when incomes rise but, the reverse has been true in the case of West Bengal. It collected more taxes as a share of income in 2012/13 than it did in 2023/24 (5.55 % compared to 5.45 % of GSDP, penultimate column, Table 1). As discussed earlier, a growing informal sector where workers are not taxed (e.g., those employed in the retail, hospitality, construction, agriculture sectors, etc.) is mainly responsible for sluggish tax collections. But, low “tax buoyancy” is not simply a feature of West Bengal’s economy. In general, India collects less taxes than do developing countries as a whole (20.1 % of GDP versus an average of 25.8 % of GDP for the period 2020 to 2024; World Economic Outlook, IMF). Social transfersThere are three issues related to social transfers—that of need, sustainability, and quality. Poor economic performance creates a need for more social transfers in order to support a larger number of people trapped in poverty. While distribution systems need to ensure that transfers reach eligible beneficiaries with minimum cost, loopholes, or leakages, social benefit programs often feed corruption if overall governance is poor and the administrative machinery is weak. Even digital cash transfers which have effectively cut out the middle man and reduced the scope for corruption, cannot entirely prevent the fraudulent transfer of benefits to those who do not need them and the denial of benefits to those who do. Hence, it is not surprising to read reports of significant administrative lapses linked to social programs like the MGNREGA. For example, within three years of West Bengal receiving funds under the scheme, the center withheld further payments due to irregularities in implementation. In another case, some ₹1,000 crores were siphoned off the program in Punjab through bribes, ghost accounts, and fraudulent pricing of goods. These reports go to show that digitization does not automatically protect social programs against fraud. They still need strict oversight and periodic audit. The greater need for social transfers also raises the question whether the government can afford it (i.e., whether transfers are fiscally sustainable). In order to answer this question, we need to go beyond total social transfers and look at the breakdown by source of funding. Transfers could be state-funded, central government funded, or a mix of the two. While the former is wholly funded through a state’s own revenue sources, central government schemes may not necessarily be wholly funded by the center. Hence, some centrally funded social transfer programs (such as the Mahatma Gandhi National Rural Employment Guarantee Act, MGNREGA) can also contribute to financial pressures on the state. Indeed, if a state’s share of a centrally funded program falls short of requirement for any reason, the center may withhold related funds from the state. So, simply ranking states based on total transfers does not capture the varying fiscal pressures on them to raise revenues. Instead, the FHI 2025 NITI Aayog report noted that “Social service expenditure as a proportion of State’s Total Expenditure stood at 28.2% in 2022-23 which is lower than the average of major states” (emphasis added, pg. 73, FHI 2025). Besides the fact that total transfers do not adequately capture sustainability issues, the report leaves the impression that more social spending is better. Yet, we have not seen any government report establish the case that more transfers are either fiscally sustainable or economically justified. Be that as it may, West Bengal has been able to increase total social transfers without an increase in the fiscal deficit, debt and interest burdens, or a decline in capital expenditures. Although this is commendable, the pace of expansion in social transfers may not be sustainable, given that deficits are already well over the prudential limit (Chart 2). There are other signs of overreach as well. For instance, it is concerning that in 12 years (2010-11 to 2022-23), social transfers increased from just 29.1% to 90.7% of the state’s own tax and non-tax revenues (fourth column from the right, Table 1). At this rate, West Bengal will become increasingly dependent on central government transfers to fund its ambitious social programmes. In fact, this growing dependency is already showing up in the declining share of own revenues in total revenues which includes transfers from the center (from 50 to 46 %; Table 1). In fact, experience shows that social transfers tend to take on a life of their own – they are far easier to introduce than they are to pare down, let alone withdraw. So, governments need to seriously consider issues of sustainability particularly if tax collections have been sluggish. Disaggregated data on social expenditures would allow a sharper focus on their sustainability. In general, regional parties – like the TMC, the Janata Dal (United), and the Telugu Desam Party – are not on a level playing field vis-à-vis the BJP when it comes to the capacity to finance social transfers. This is because states do not have the same capacity to raise their own revenues as does the Union government other than to improve the business climate and try to increase formal sector jobs, which has been challenging for India as a whole. Given issues of sustainability and proliferation of various social transfers over time, states also need to evaluate their quality. For instance, there are telltale signs that social transfers are often extended to buy votes and ensure vote bank loyalty rather than to empower disadvantaged groups. Why else would transfers increase sharply in the years leading up to the elections? Barring the 2011 elections when the TMC came to power, they increased from 9.6% to 12.5% of total expenditures in the three-years prior to the 2014 elections, from 16.0 to 19.4% in the years prior to the 2019 elections and from 18.8 to 28.2 % before the last elections in 2024 (Table 2). Table 2. West Bengal: Share of State Expenditures in Total Expenditure, 2010/11-2024-25 (in percent)Indeed, promising (then, having to deliver) large social transfers has become a political football in India. A recent article in The Economist noted that “To beat Mr. Modi and the BJP other parties reckon they need to emulate them”. So, it has become imperative for regional parties like the TMC to introduce their own versions of the dole. ConclusionWest Bengal’s unfavourable business and labour market environment began in early 1967 with the end of the Congress government of Prafulla Chandra Sen. Economic conditions deteriorated during the 23-year rule of the Left Front government. Since coming to power in 2011, the TMC has been trying to reverse the economic decline and strengthen the fiscal position but they remain a work in progress. Revenue generation cannot be divorced from a state’s economic structure. States which have a diverse industrial base (Odisha, Chhattisgarh, Gujarat, Maharashtra) also tend to generate more taxes (based on incomes and corporate profits) compared to those that have a smaller industrial footprint or are more agrarian like Andhra Pradesh, West Bengal and Punjab. Boosting revenues is not simply a matter of trying to expand the existing tax net, strengthening tax collection or controlling tax evasion. At heart, is the need to bring about a structural economic transformation. But, it takes a long time for a state to develop competitive industries that generate good-quality formal sector jobs. Otherwise, it is hard to explain why after nearly 80 years since independence, India is still struggling with massive unemployment. Economic and fiscal weaknesses are often intertwined. While fiscal mismanagement can (and does) contribute to poor fiscal health, the main driver of fiscal weakness in the long run is poor economic performance. So, while a few states with small pockets of industrialization ensure relatively better FHI scores, others with a large informal sector, high unemployment and underemployment, suffer from low economic growth and poor fiscal health. The preponderance of the informal sector is probably one of the main reasons why India collects less taxes as a share of its GDP than do developing countries in general. In that sense, FHIs cast a narrow beam that tends to miss the forest for the trees. A fuller analysis of the sustainability and quality of social expenditures would require disaggregated data on central and state funding of social programs. Nevertheless, even the data on total transfers suggest that West Bengal may be unable to sustain the current pace of expansion without becoming increasingly dependent on central government transfers or sacrificing fiscal prudence. Of late, the government has started taking some initiatives to improve the business climate and attract private investment. These initiatives have the potential to reverse the state’s industrial decline, boost their own source of revenues, and allow greater financial independence from the center. For instance, the Bengal Silicon Valley Tech Hub which was formed in 2018, is expected to generate 75,000 jobs. As a result, Infosys inaugurated its Kolkata Development Center in December 2024. The information technology consultancy is expected to employ 4,000 workers in the IT sector. Several other Indian private and public sector companies such as Adani Enterprises, Indian Statistical Institute, Ministry of Electronics and Information, Reliance Jio (in collaboration with Microsoft), and Tata Consultancy Services (TCS), have already started constructing facilities on 200 acres of land allocated for the project. There are also ongoing efforts to find crude oil and mineral deposits in the state. While it is still too early to say whether these initiatives will bear fruit on the scale envisaged, efforts are well underway to restore West Bengal’s former glory as an industrial powerhouse. Dev Kar is the chief economist emeritus at Global Financial Integrity and a Fellow at Yale University. Prior to this, he was a senior economist at the International Monetary Fund (IMF) where, in a career spanning nearly 32 years, he worked in various departments and visited many countries on missions.
