By P. SESH KUMAR
West Bengal’s finances face a structural squeeze as debt, welfare commitments and interest payments increasingly crowd out development spending.
West Bengal’s finances today resemble a grand political theatre built atop a narrowing fiscal ledge. The State has undeniably expanded welfare delivery, broadened social transfers, and sustained a politically resilient consumption economy. Yet beneath the rhetoric of inclusive governance lies a harsher arithmetic now visible in the latest assessments of the Sixteenth Finance Commission, NITI Aayog’s Fiscal Health Index, the State’s own Medium-Term Fiscal Policy (MTFP) statements, and the budget reviews linked to the CAG/Accountant General’s analyses.
Revenue receipts have grown impressively, especially through GST-linked taxation and central tax devolution, but debt continues to tower above peer states, revenue deficits persist stubbornly, interest payments are swallowing an alarming share of revenue receipts, and capital expenditure repeatedly shrinks during actual implementation despite ambitious announcements.
West Bengal is therefore not facing an immediate fiscal collapse; it is facing something more dangerous -a slow-moving structural squeeze where welfare obligations, debt servicing and political compulsions are crowding out future developmental flexibility. The State’s challenge is not merely how to spend more, but how to survive the cumulative weight of what it has already promised.
West Bengal’s fiscal story is often narrated emotionally, either as heroic welfare resistance against central discrimination or as an impending bankruptcy drama. Both narratives miss the deeper truth. Bengal’s finances are neither collapsing overnight nor comfortably sustainable. They are trapped in what economists would call a “high-debt, high-commitment equilibrium.”
The State still raises substantial taxes, its economy has not stagnated into irrelevance, and its borrowing access remains open. Yet the sheer burden of committed expenditure- salaries, pensions, subsidies and interest payments- has become so dominant that the budget increasingly resembles a survival mechanism rather than a transformative developmental instrument.
The first striking feature is the extraordinary persistence of debt. In 2018–19, West Bengal’s debt stock stood at around ₹3.93 lakh crore, amounting to 35.69 per cent of Gross State Domestic Product (GSDP). The pandemic years transformed this stress into a full-fledged fiscal overhang. By 2020–21, debt ballooned to over 42 per cent of GSDP.
Even after partial normalization, the State’s own Medium-Term Fiscal Policy Statement (MTFP) for 2025–26 projected debt at nearly ₹7.72 lakh crore and around 38 per cent of GSDP. That figure is not merely high in isolation; it is far above the median debt profile of major Indian states identified in NITI Aayog’s macro-fiscal comparisons.
Maharashtra’s debt ratio remains below 20 per cent. Tamil Nadu struggles with debt too but possesses a far stronger own-revenue structure. Bengal therefore occupies an uncomfortable middle ground- carrying debt burdens closer to fiscally stressed states without enjoying the industrial dynamism or revenue buoyancy of richer states.
The second feature is the persistence of revenue deficits. Under India’s fiscal responsibility framework, states were expected to eventually eliminate revenue deficits and borrow largely for productive capital creation. Bengal has repeatedly failed this test. Revenue deficits widened sharply during the pandemic, moderated briefly thereafter, and then again deteriorated in projections for 2024–25 before a new round of corrective promises emerged in the 2025–26 and interim 2026–27 budgets.
States’ Finances: Freebies, Fiscal Folly, and the Borrowed Future
The problem is not simply numerical slippage. The Sixteenth Finance Commission’s evaluation study on West Bengal bluntly observed that actual revenue deficits, fiscal deficits and debt levels have “usually exceeded” budget estimates. That single observation is devastating because it questions not just fiscal performance but fiscal credibility itself. A budget loses strategic value when optimism repeatedly outruns reality.
The State’s defenders argue that Bengal has been unfairly constrained by the Centre through delayed dues, GST compensation uncertainty and reduced grants. There is some truth in that argument. Central grants have indeed fluctuated sharply. Yet Bengal’s deeper weakness lies elsewhere. Unlike Kerala’s famous “grant illusion,” where temporary revenue-deficit grants masked structural weaknesses, Bengal’s problem is a chronic dependence on transaction-heavy taxation combined with weak non-tax revenue generation.
SGST, excise duties, stamp duties, VAT on petroleum products and vehicle taxes constitute the backbone of the State’s own revenues. These are buoyant during periods of high consumption and property transactions but vulnerable during economic slowdowns. Own non-tax revenue, meanwhile, remains astonishingly weak for a State of Bengal’s size.
The budgetary pattern exposes this vulnerability vividly. The State repeatedly projected ambitious non-tax revenue figures which later collapsed in revised estimates and actuals. This matters because unrealistic budgeting creates an illusion of fiscal space that evaporates mid-year. When revenues fail to materialise, the first casualty is usually capital expenditure, not recurring welfare commitments. Thus Bengal’s budgets often begin with grand infrastructure promises and end with expenditure compression in roads, irrigation, flood control and asset creation.
That brings us to the most critical structural issue: the dominance of committed expenditure. Interest payments alone have become a fiscal monster. By 2024–25 revised estimates, interest payments exceeded ₹46,000 crore annually, consuming roughly one-fifth of revenue receipts according to NITI Aayog’s Fiscal Health Index. Salaries and pensions added another gigantic layer of rigidity.
Together, salaries, pensions and interest payments absorbed well over sixty per cent of the State’s revenue receipts. Before the government constructs a bridge, upgrades a hospital or modernises irrigation infrastructure, the treasury is already substantially exhausted.
This is where Bengal’s fiscal narrative becomes politically explosive. Welfare expansion remains central to the State’s political identity. Schemes such as Lakshmir Bhandar are no longer mere social programmes; they are embedded political institutions. The interim budget for 2026–27 announced substantial enhancement of benefits, adding nearly ₹15,000 crore annually to recurring expenditure commitments. Politically, this is understandable. Economically, it deepens structural rigidity. Bengal’s welfare model is not collapsing; it is becoming progressively costlier at a time when fiscal flexibility is shrinking.
Critics often caricature welfare expenditure as economically wasteful. That criticism is simplistic. Welfare spending in Bengal has undoubtedly sustained rural consumption, female financial inclusion and political stability. The deeper problem is not welfare per se, but the imbalance between current consumption expenditure and productive capital formation.
A fiscally sustainable welfare state ultimately requires a growing productive economy capable of generating expanding revenues. Bengal’s challenge is that capital expenditure, though loudly proclaimed in speeches, often contracts sharply in revised estimates and actual outcomes.
This gap between announcements and execution is perhaps the most underappreciated weakness in Bengal’s finances. In 2025–26, the budget proposed capital expenditure exceeding ₹39,000 crore. Revised estimates later reduced this dramatically. Revenue expenditure, however, remained broadly intact. This pattern reveals the political hierarchy inside the budget. Welfare and committed expenditure are politically untouchable; infrastructure spending becomes the adjustment valve whenever fiscal stress intensifies.
The tragedy is that Bengal desperately needs stronger capital formation. The State continues to face serious infrastructure gaps in logistics, flood management, industrial connectivity and urban renewal. Climate vulnerability alone demands sustained investments in embankments, drainage systems and coastal protection. Yet these are precisely the sectors vulnerable to expenditure compression. Bengal thus risks entering a vicious cycle where weak capital formation constrains future growth, which then weakens future revenues, which in turn intensifies fiscal pressure further.
NITI Aayog’s assessments deepen this concern. Its macro-fiscal landscape study noted that Bengal simultaneously exhibits relatively high debt and relatively modest developmental expenditure ratios. In other words, the State is carrying the liabilities of a highly interventionist government without fully enjoying the growth dividends one would expect from such borrowing.
This is perhaps the most uncomfortable finding in the entire debate. Borrowing is not inherently dangerous if it finances transformative productivity-enhancing assets. But borrowing that mainly sustains recurring expenditure gradually converts the State into a refinancing machine.
To Bengal’s credit, the State does not appear to possess Kerala-style giant off-budget infrastructure vehicles dominating the liability structure. The disclosures in Budget Publication No. 6 suggest that large-scale concealed borrowing conduits of the Kerala, Andhra Pradesh and Telangana’s variety are not visible in the same dramatic manner. Yet quasi-fiscal risks certainly exist.
Power sector entities continue to carry substantial guarantee exposure. Public sector obligations and credit-linked schemes generate contingent liabilities that could migrate onto the budget during stress periods.
The power sector deserves special attention. Across India, discom liabilities and quasi-fiscal energy subsidies remain hidden stress points. Bengal is not immune. Guarantees extended to power corporations and development entities represent latent fiscal risks. These do not always appear immediately in headline deficit numbers, but they become future burdens whenever restructuring or bailouts become unavoidable. This is one reason why fiscal analysts increasingly insist on “whole-of-government accounting” rather than narrow budget arithmetic.
Another striking feature is Bengal’s growing dependence on market borrowing. State Development Loans have become central to fiscal management. Market loans now constitute a massive share of outstanding debt. This means Bengal’s fiscal future is increasingly linked to interest-rate conditions and investor confidence. India’s states do not yet face aggressive market discipline comparable to sovereign debt markets internationally, but rising debt-service obligations gradually reduce developmental discretion even without a formal crisis.
The Finance Commission’s broader recommendations on fiscal accountability therefore acquire particular significance for Bengal. The Sixteenth Finance Commission emphasised stronger fiscal transparency, more credible medium-term fiscal frameworks and better reporting standards for states with persistent debt deviations. Bengal fits squarely within the category of states requiring sustained fiscal discipline rather than episodic cosmetic corrections.
The political economy dimension cannot be ignored either. Bengal’s budgetary culture increasingly reflects electoral welfare competition. Welfare announcements produce immediate political returns. Infrastructure investments generate delayed and uncertain electoral dividends. Consequently, the revenue account grows politically muscular while capital expenditure remains fiscally vulnerable. This is not unique to Bengal, but Bengal’s high debt burden magnifies the danger.
The comparison with Kerala is revealing. Kerala’s crisis became visible after revenue-deficit grants ended. Bengal’s stress is less dramatic but more persistent. Bengal is not dependent on a single disappearing grant stream; it is dependent on a structurally stretched budget model that relies heavily on continued consumption buoyancy, central devolution growth and uninterrupted market borrowing access. That makes Bengal’s fiscal stress slower-moving but potentially more entrenched.
The State nevertheless retains important strengths often ignored in alarmist narratives. Own-tax collections have grown substantially over the past several years. GST mobilisation remains meaningful. The economy still possesses significant urban consumption capacity. Welfare expenditure has prevented extreme social distress. Debt ratios, while high, have stabilised somewhat below pandemic peaks. Bengal is therefore not a bankrupt state stumbling toward collapse. It remains fiscally functional and politically resilient.
But fiscal functionality is not the same as fiscal sustainability. That distinction is crucial. A government can survive for years by rolling over debt, compressing capital expenditure and relying on recurring borrowing. The real question is whether such a model leaves room for future growth, climate resilience, infrastructure modernisation and demographic pressures. On that test, Bengal’s fiscal architecture appears increasingly strained.
The way forward therefore requires far more than rhetorical battles with the Centre or celebratory budget speeches. Bengal needs a hard fiscal reset anchored in credibility. First, revenue projections must become realistic rather than politically decorative. Overestimating grants and non-tax revenues only postpones adjustment. Second, capital expenditure protection mechanisms are essential so that infrastructure spending is not repeatedly sacrificed during fiscal stress. T
hird, public-sector liabilities and contingent guarantees require transparent disclosure and monitoring. Fourth, welfare targeting must become sharper to ensure that social expenditure produces measurable developmental returns rather than merely recurring political obligations.
Most importantly, Bengal requires a growth strategy capable of expanding its future tax base. Fiscal sustainability ultimately depends not on accounting tricks but on productive expansion. Industrial revitalisation, logistics connectivity, tourism infrastructure, urban renewal and technology-driven services are not optional ambitions anymore; they are fiscal necessities. A stagnant or slow-growing economy cannot indefinitely sustain a high-welfare, high-debt political order.
West Bengal today stands at a fascinating but dangerous fiscal crossroads. It has avoided the spectacular implosion predicted by critics. Yet it has also failed to achieve the durable fiscal stabilization promised in repeated budget narratives. The State’s finances now resemble a tightrope act performed over an expanding debt canyon. Welfare politics continues to provide applause. Borrowing continues to provide balance. But gravity- fiscal gravity- is becoming steadily harder to defy.
Montek Singh Ahluwalia Flags Structural Weaknesses in Economy
Federal Friction or Fiscal Squeeze? Bengal’s Battle Over “Political Federalism” and the GST-Era Transfer Trap
The allegation that the Union Government (till very recently) financially squeezed West Bengal for political reasons cannot simply be dismissed as partisan rhetoric, because the underlying data itself reveals repeated and unusually prolonged disputes over fund flows, especially after the advent of the GST regime which significantly reduced states’ independent taxation autonomy.
West Bengal repeatedly claimed that thousands of crores relating to MGNREGA reimbursements, PMAY releases, GST compensation adjustments and other scheme-linked dues remained pending or delayed, thereby aggravating the State’s already stretched fiscal position. The political charge gained traction because the disputes unfolded publicly and disproportionately between the Centre and Opposition-ruled states.
Yet a careful examination shows that the issue is more institutionally complicated than the simplistic slogan of “political vendetta.” Under GST, states surrendered substantial fiscal sovereignty in return for an assured compensation mechanism which itself was designed only as a transitional arrangement. When compensation cess collections weakened during and after the pandemic, the Centre itself resorted to large-scale borrowing to bridge the compensation gap.
Moreover, many transfers under centrally sponsored schemes became increasingly conditional upon utilisation certificates, Aadhaar compliance, audit reconciliation and scheme-level verification. The Union Government therefore consistently argued that delays were compliance-driven rather than politically motivated.
However, Bengal’s grievance acquired empirical support from a broader national trend highlighted before the Sixteenth Finance Commission: states increasingly complained that although the formal devolution share rose after the Fourteenth Finance Commission from 32 per cent to 42 per cent, the effective divisible pool itself shrank because the Union increasingly mobilised revenues through cess and surcharges, which are constitutionally excluded from sharing with states.
RBI-linked and parliamentary discussions cited by multiple states showed that the divisible pool reportedly declined from nearly 89 per cent of gross tax revenues in 2011 to about 79 per cent by 2021 due to the expanding role of cess collections. Trinamool Congress leaders claimed that cess collections alone rose by over 460 per cent between 2015 and 2024 and that nearly ₹5.7 lakh crore of cess and surcharge collections remained outside normal devolution channels.
What makes the controversy particularly significant is that Bengal’s fiscal dependence on central transfers remains substantial despite its political rhetoric of fiscal autonomy. The State’s own Medium-Term Fiscal Policy (MTFP) statements and Finance Commission memoranda repeatedly acknowledged high debt servicing burdens and persistent revenue deficits. Consequently, delayed central transfers or uncertain GST compensation flows had a disproportionately magnified effect on Bengal’s liquidity position and borrowing needs. At the same time, the Centre countered that Bengal continued to receive very substantial tax devolution and that aggregate transfers had increased over the decade.
Thus, the dispute was not over absolute denial of funds but over timing, composition, conditionalities and perceived discretionary treatment. The Sixteenth Finance Commission discussions may nevertheless provide partial relief to Bengal irrespective of political equations because an unusually broad coalition of states — including Karnataka, Telangana, Kerala and others, not merely Bengal — demanded either enhancement of vertical devolution beyond the present 41 per cent or curbs on excessive use of cess and surcharge collections that bypass state sharing.
Although initial reports suggest that the Sixteenth Finance Commission may retain the overall 41 per cent devolution formula, it has simultaneously emphasised greater transparency in tax devolution data, stronger formula-based transfers and more predictable fiscal frameworks for states.
Bengal could benefit indirectly because any recalibration reducing the relative dominance of cess collections, or any greater weight assigned to debt stress, population and fiscal need in horizontal devolution, would improve the State’s net transfers. In effect, Bengal’s complaint is not entirely imaginary, but neither is it entirely reducible to “political theatre.” The real story is that GST-era fiscal federalism has created a structurally asymmetric system where states surrendered taxation powers while simultaneously becoming more dependent on a Union-controlled transfer architecture increasingly shaped by conditionalities, cess-driven revenue retention and politically charged negotiations.
In the final analysis, West Bengal’s fiscal story is no longer merely a tale of deficits, debt ratios and budget arithmetic; it has evolved into a larger national debate on the future of Indian fiscal federalism itself. Bengal today stands trapped between two grinding forces – internally, a structurally rigid welfare-and-debt architecture that leaves shrinking room for developmental manoeuvre, and externally, a GST-era fiscal order in which states have surrendered major taxation powers while becoming increasingly dependent on centrally mediated transfers, conditional releases and a divisible pool steadily diluted by cess and surcharge collections.
The State’s complaints of delayed dues and politically charged fiscal treatment cannot be brushed aside as pure theatre, because the broader data reveals a genuine centralising drift in India’s fiscal architecture. Yet Bengal’s own weaknesses are equally undeniable. No amount of federal grievance can permanently camouflage persistent revenue deficits, mounting interest burdens, weak capital formation and the political temptation to prioritise immediate welfare optics over long-term fiscal restructuring.
The real danger therefore is not an imminent financial implosion but a gradual erosion of fiscal sovereignty itself – where a heavily indebted state survives through perpetual borrowing, negotiated transfers and compressed development spending while its future growth capacity steadily weakens. The Sixteenth Finance Commission may soften some of the pressure through recalibrated devolution and greater recognition of fiscal stress among states, but no Finance Commission can permanently rescue a state from structural imbalance. Ultimately, Bengal’s future will depend not on courtroom-style political battles with Delhi alone, nor on emotionally charged narratives of discrimination, but on whether it can reinvent its fiscal model around credible budgeting, productive capital creation, transparent accounting and growth-led revenue expansion.
Otherwise, Bengal risks becoming the textbook example of a politically resilient but fiscally exhausted welfare state- loud in political mobilisation, ambitious in social promises, yet increasingly constrained by the unforgiving mathematics of debt, interest and dependency.
From Fiscal Warfare to Fiscal Alignment? Bengal’s New Delhi Dividend After the Great Political Turnover
The political earthquake in West Bengal after nearly fifteen years of Trinamool Congress dominance has dramatically altered not merely the State’s power equations but potentially its fiscal destiny itself. With the BJP now controlling both New Delhi and Kolkata, Bengal’s financial narrative may be entering an entirely new phase where confrontation-driven federalism gives way to alignment-driven fiscal accommodation.
For years, Bengal’s budgetary discourse was marked by a constant tug-of-war with the Union Government over GST compensation, MGNREGA dues, PMAY allocations, disaster relief, infrastructure clearances and centrally sponsored schemes, with every funding delay quickly escalating into a political battle over “fiscal discrimination” and “weaponised federalism.” That adversarial climate imposed invisible but very real economic costs by slowing project approvals, delaying reconciliations, complicating borrowing negotiations and generating uncertainty around central support flows.
The new dispensation in Kolkata is therefore widely expected to unlock smoother fiscal coordination, faster release of pending funds, greater flexibility in scheme implementation and a more generous alignment of central infrastructure investments with state priorities.
Expectations are already mounting that Bengal could witness accelerated approvals for highways, ports, logistics corridors, industrial parks, rail connectivity, urban infrastructure and flood-management projects under a politically synchronised Centre–State framework. Equally significant is the perception that the Union Government may now adopt a more accommodative stance on borrowing ceilings, externally aided projects and special financial packages, particularly if Bengal is projected as a flagship “turnaround state” after years of political confrontation.
Yet the deeper implication is psychological as much as financial. Investors and markets often read political alignment as a signal of administrative stability, smoother clearances and reduced policy friction. That alone can improve investment sentiment. However, the new government also inherits a dangerous fiscal paradox: political alignment with Delhi may temporarily ease liquidity stress and expand fiscal space, but it cannot magically erase Bengal’s structural debt burden, ballooning interest payments, rigid welfare commitments and weak capital formation overnight.
The real test, therefore, is whether the BJP government merely enjoys a honeymoon of enhanced federal generosity or actually uses the opportunity to engineer a durable fiscal restructuring capable of transforming Bengal from a subsidy-heavy consumption economy into a growth-driven revenue-generating powerhouse.
From Yearbook to Watchdog: Rethinking State Finances Reports
Follow The Raisina Hills on WhatsApp, Instagram, YouTube, Facebook, and LinkedIn
