State of State Finance: West BengalJayanta Kumar Dwibedi

jayantadw@rediffmail.com

Evaluation of state finance Benchmarking

Individual indicators

Composite index

Identifying primary factors

Fiscal Performance Index (FPI)Individual Indices and the Indicator Variables

Own Tax Earning Performance Index (OTR/GSDP)

Own Tax Spending Performance Index (OTR/RE)

Development Expenditure Performance Index (DE/NDE)

Commitment Capacity Performance Index (1-CE/RR)

Committed Expenditure Performance Index (1-CE/RE)

Debt Performance Index (1- Debt/GSDP)

Methodology……..

n

ii=1

1FPI = FPI

n

State OTR/GSDP (2011-12)

Andhra Pradesh 8.15

Bihar 5.12

Chhattisgarh 7.52

Goa 7.03

Gujarat 6.78

Haryana 6.83

Jharkhand 5.47

Karnataka 9.88

Kerala 8.39

Madhya Pradesh 8.36

Maharashtra 6.91

Odisha 6.21

Punjab 7.83

Rajasthan 5.81

Tamil Nadu 9.38

Uttar Pradesh 7.43

West Bengal 4.58

Own Tax Earning Performance Index

= [(8.15-4.58)/(9.88-4.58)]= 0.67

0.10

0.55

0.46

0.42

0.42

0.17

1.00

0.72

0.71

0.44

0.31

0.61

0.23

0.91

0.54

0.00

State Ranking (2002-03) Ranking (2011-12)

Andhra Pradesh 7 5

Bihar 16 14

Chhattisgarh 2 2

Goa 4 8

Gujarat 8 9

Haryana 3 4

Jharkhand 11 12

Karnataka 1 1

Kerala 10 13

Madhya Pradesh 9 6

Maharashtra 6 7

Odisha 15 10

Punjab 13 16

Rajasthan 12 11

Tamil Nadu 5 3

Uttar Pradesh 14 15

West Bengal 17 17

What’s behind West Bengal’s Dismal State of State Finance?

State RE/GSDP

Andhra Pradesh 13.8%

Bihar 18.9%

Chattisgarh 16.2%

Goa 15.3%

Gujarat 9.8%

Haryana 10.4%

Jharkhand 16.1%

Karnataka 14.1%

Kerala 14.6%

Madhya Pradesh 17.0%

Maharashtra 9.9%

Odisha 16.1%

Punjab 12.7%

Rajasthan 12.9%

Tamil Nadu 13.1%

Uttar Pradesh 18.1%West Bengal 13.5%

RR/GSDP

14.8%

22.8%

19.9%

16.8%

10.2%

10.9%

19.8%

14.8%

12.6%

20.5%

10.0%

18.6%

12.0%

13.5%

13.4%

20.1%

10.9%

What’s behind West Bengal’s Dismal State of State Finance?Analysis of Revenue Profile

Central Transfers Own Revenue Generation

CFC Transfers: Contribution Vs Share

State Contribution

(%) Tax share (%)

Andhra Pradesh 8.9 7.2

Bihar 2.2 11.0

Gujarat 7.9 3.4

Karnataka 6.4 4.4

Kerala 4.3 2.5

Madhya Pradesh 4.1 6.9

Maharashtra 16.2 5.1

Odisha 3.0 5.0

Punjab 3.6 1.3

Rajasthan 4.8 5.7

Tamil Nadu 8.6 5.2

Uttar Pradesh 9.4 19.5West Bengal 7.3 7.1

CT/GSDP (11-12)

4.8%

17.2%

2.5%

4.2%

3.3%

9.9%

2.3%

10.1%

2.7%

5.6%

3.1%

10.7%

5.8%

OR/GSDP (11-12)

10.0%

5.6%

7.7%

10.6%

9.3%

10.6%

7.7%

8.5%

9.3%

7.9%

10.3%

9.4%

5.1%

Analysis of Revenue Profile……..

Dependence of Central Transfer Increased Significantly

YearWest Bengal Andhra Pradesh

Share of Own

Revenue

Share of

Central

Transfer

Share of

Own

Revenue

Share of

Central

Transfer

2003-2004 56.4 43.6 64.8 35.2

2011-2012 44.7 55.3 69.5 30.5

Own Tax Revenue Effort

The actual tax collection-to-gross domestic product (GDP) ratio is generally interpreted as a measure of tax effort and used as the basis for cross country tax comparison.

A positive relationship between tax to GDP and per capita income.

Tax structures are progressive. Demand for government services is income–elastic, so the

share of goods and services provided by the government is expected to rise with income.

The tax-to-GDP ratio could provide a “completely distorted” picture due to different economic structures, institutional arrangements and demographic trends.

Own Tax Revenue Effort…….Tax effort by Income Groups (cross country), 1994-2009

OTR/GSDP* is generally interpreted as a measure of tax effort and used as the basis for cross state tax comparison. CFCs and others (in case of devolutions) also used this index to capture fiscal prudence of states.

* Adjusted

1994 1998 2004 2009

21.2

28.4 28.4 29.3

18.817.1 18

19.3

11.310 10.5

13.6

Tax Revenue ( % of GDP) by Income Groups, 1994-2009

High Income Middle Income Low Income

Splicing……….

Splicing……….

Tax Effort of Indian States………….OTR-GSDP and per capita income 2011-12

0 20000 40000 60000 80000 100000 120000 140000 160000 1800000.00

2.00

4.00

6.00

8.00

10.00

12.00

Andhra Pradesh 8.15

Bihar 5.12

Chattisgarh 7.52

Goa 7.03Gujrat 6.78 Haryana 6.83

Jharkhand 5.47

Karnataka 9.88

Kerala 8.39Madhya Pradesh 8.36

Maha 6.91

Odisha 6.21

Punjab 7.83

Rajsthan 5.81

Tamil Nadu 9.38

Uttar Pradesh 7.43

( WB )4.58

Tax Effort of Indian States………….

Estimation of taxable capacity and tax effort: Regression analysis using panel data(17 GCS -11 years)……

Taxable capacity- Predicted tax revenue that can be estimated with the regression

Tax efforts- The ratio between actual tax collection and the predicted taxable capacity.

A value >1 indicates High Tax Effort

Low collection does not necessarily imply low effort

1 2PCOTR PCI SECTGSDP

Tax Effort of Indian States………….

Estimated equation…….R-sq: within = 0.9066 between = 0.9408 overall = 0.9255---------------------------------------------------------------------

---------PCOTR Coef. Std. Err. t P>|t|-------------+----------------------------------------------------------------PCI .088689 .0021904 40.49 0.000CONS -.3659232 .1059625 -3.45 0.001

-------------

+----------------------------------------------------------------

Tax Effort of Indian States………….Low Tax Efforts………

West Bengal: 64% Jharkhand: 74%

Odisha: 85%

High Tax Efforts……..Karnataka: 132%

Tamil Nadu: 119%

Madhya Pradesh: 116%

Consumption as Tax Base……..

Consumption and tax collection?

85-90% of state’s own tax collection are taxes on commodities and services(80 % of that from VAT)

Being indirect in nature they are expected to be more closely related to consumption than income.

Consumption as Tax Base……..Per-capita Consumption and tax collection

5000.0 10000.0 15000.0 20000.0 25000.0 30000.00.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

Andhra Pradesh 23.1%

Bihar 8.5%

Chattishgarh 25.4%

Goa 35.9%

Gujrat 26.8%

Haryana 24.8%

Jharkhand 15.0%

Karnataka 31.0%

Kerala 21.6%

Madhya Pradesh 18.2%

Maharastra 25.5%

Odisha 19.8% Punjab 20.1%

Rajasthan 15.9%

Tamil Nadu 28.8%

Uttar Pradesh 13.7%West Bengal 12.8%

Consumption Behaviour and Tax Collection?A conceptual framework………A Counterfactual exercise:

VAT on Petro Products (2011-12)

With GSDP as tax baseWith sale of petro

productsas the tax base

Potential Revenue (with AP’s tax effort) (Rs. Crore) 7758.5 5372.1

Actual collection (Rs Crore) 4227.3 4227.3

Realisation (%) 54.5% 78.7%

Consumption Behaviour and Tax Collection? Important Consumption items like per-capita petro sates,

per-capita electricity consumption, number of registered vehicles in West Bengal is significantly lower than comparable states like Andhra Pradesh.

These consumption items are important for tax generation.

West Bengal’s figures are surprisingly lower than states with lower per-capita income (than West Bengal ); like Rajasthan, Chattisgarh and Odisha.

Informalisation/Underreporting/Corruption?

All of them?

Thank You !