West Bengal Budget: Focus On Capex Growth But Targets Stretched, Says India Ratings

West Bengal has stepped up its focus on capital expenditure, but estimates of spending in the coming year may not be easily achievable. This could mean that the state's fiscal deficit for FY23 would come in lower than budgeted, said India Ratings and Research.

In its budget, the state has pegged the revised estimate for FY22 fiscal deficit at 3.47% of gross state domestic product. For FY23, the deficit is pegged at 3.64%. The revenue deficit is seen at 2.15% this year and at 1.65% next fiscal, the ratings agency said in a note dated March 24.

India Ratings and Research expects the revenue deficit of West Bengal in FY23 to come in at 1.4% of GSDP and sees the fiscal deficit at 3%.

"India Ratings expects the revenue receipt growth in West Bengal to be higher than the budget estimate. Furthermore, optimistic assumptions regarding capital expenditure could result in a better fiscal deficit," it said in the note.

Focus On Capital Expenditure

Like many other states, West Bengal stepped up capital expenditure amid the pandemic. It sees this rise further in FY23.

According to budget estimates, the state plans to raise capex by nearly 68% over the revised estimates of FY22. "Historically, on an average, the capex growth in the state was 14.8% during FY16-FY20. The annual capex growth for FY23 appears to be steep on an already inflated base," said India Ratings, adding that the target is stretched and unattainable.

In contrast to capital expenditure estimates, the state's projections for revenue spending seem reasonable.

Revenue expenditure in FY23 is budgeted to grow at 8.29% over the revised estimates of FY22. "The average revenue expenditure growth of West Bengal during FY16-FY20 had been 9.5%," India Ratings said. Non-interest revenue expenditure, which generates demand in the economy, is budgeted to grow at 8.57% in FY23.

Revenue Receipts May Be Higher Than Budgeted

West Bengal has assumed nominal GSDP growth of 11.48% in FY22 compared to 18.11% in FY22. India Ratings believes that the GSDP growth assumption is achievable, given the likely inflation in FY23.

On that base, the state is expecting its own tax revenue to rise by 7.36% in FY23. India Ratings, however, expects West Bengal’s own tax revenue growth to come in at 14.98%. "The state’s conservative assumption regarding SOTR growth may provide a buffer to factor in for any unforeseen expenditure or shortfall of transfers from the union government," the rating agency said.

The revenue growth assumption in FY23 with respect to the tax devolution and grants is realistic, it added.

No Medium-Term Plan

States are required to provide a medium-term fiscal framework, but West Bengal has not.

The state's debt-to-GSDP ratio is at a relatively high 34.2% in FY23, according to budget estimates. This is unlikely to come down to 32.8% as projected by the Fifteenth Finance Commission. "The state has to clock a nominal GSDP growth rate in the range of 12%-14% to contain its debt/GSDP ratio at 32.8% by FY25," the India Ratings note said.