PRAGOTI

The Industrial Policy of West Bengal was introduced in 1994. It was framed in a context when the neo-liberal policies were already introduced in 1991. It was felt that although the neo-liberal policies are anti-people and is bringing in tremendous hardships to the common citizens of this country, yet these are also providing certain opportunities for the state governments of this country in terms of chartering a course of industrialization. It would be worthwhile in this context to mention that the discriminatory Licensing Policies of the Central Government actually neglected West Bengal in terms of setting up of new industries. Industrialists interested in setting up industries in West Bengal were not allowed. The considerations were primarily political. The abrogation of the Licensing Policy during the early nineties brought an end to all these discriminations. The government of West Bengal took this opportunity to usher in a new phase in the industrial scenario of the state. The termination of the Licensing Policy meant that private industrialists did not require prior permission from the government to set up industries.

West Bengal government took this opportunity to invite private capital, both domestic and Foreign Direct Investment (henceforth FDI). The chief consideration was to create more employment opportunities. In case of FDI, the following conditions were imposed:

(i) Which will lead to technological upgradation.

(ii) Which will create more employment opportunities.

(iii) Which will not lead to displacement of indigenous industries.

The industrialisation process gathered momentum with the coming of the Seventh Left Front government in power. Before going into details regarding the alternatives to neo-liberalism that the West Bengal government is providing, in terms of its industrialisation strategy, it is essential to look into the challenges posed by the skewed centre-state financial relations in this era of neo-liberalism.

CENTRE-STATE FINANCIAL RELATIONS

West Bengal is a constituent state of the Indian Union. The Constitution of India does not provide widespread powers to the state governments. In terms of Industrial Policy, no state government of this country can take a radically alternative path from the policies framed at the all-India level. It is within the ambit of these limited powers that the West Bengal government is functioning. So while talking in terms of alternatives it is essential that these limitations are taken into account.

At the all-India level the Left parties have always taken a firm position for more government investment in the economy. It has always argued against the disinvestment policies and the setting up of more Public Sector Units (PSU). So there has been an expectation that in those states where the Left Front is in power industrialisation policy will entail setting up of more Public Sector industrial units. In other words, the private sector will have a minimal role to play in the industrialisation drive. But, the situations confronting the state and the central governments are vastly different. It is necessary, in this context, to take a proper grasp at the Centre-State financial relations. This has been mentioned below.

There is a common argument that the state governments can take recourse to market borrowings to carry forward with the industrialisation drive. The point is, if the private capitalists can borrow from the market and set up industries then why can’t the state governments do the same? The answers are given below.

(i) The rules and regulations of the RBI states that the proportion of market borrowing vis-à-vis total borrowing of a state government would be inversely proportional to the revenue deficit (excess of its current expenditure over its receipts) as a proportion to Gross State Domestic Product (GSDP). This implies that higher the revenue deficit of a state government as a proportion to its GSDP, lower the latter can borrow from the market, as a proportion to its total borrowing. However, the revenue deficits of different state governments and particularly that of West Bengal have been high particularly due to high interest payments and other committed expenditures (as a proportion to GSDP). These are essentially the logical corollary of Central government’s own policies like that of setting interest rates high and implementation of Fifth Pay Commission recommendations. Thus the RBI sets an upper bound on market borrowing as a proportion to the total borrowing for all the state governments. This is likely to affect West Bengal the most as it bears one of the higher revenue deficits as a proportion to the GSDP.

There is another reason for the revenue deficit of West Bengal to be higher than other states-a reason which ironically follows from one of the greatest achievements of the Left Front government of West Bengal. Agricultural sector was the main stay of the economy of West Bengal. It has been the major stimulus for growth of the West Bengal economy. At the same time it is a sector which has remained outside the tax net. As a result the growth in the agricultural sector was not matched by any rise in the tax receipts of the state government. On the other hand, the GSDP has grown with the growth in the agricultural sector. The combined effect of the above two developments has resulted in a situation whereby the tax-GSDP ratio has declined. This decline in the tax-GSDP ratio is one of the main factors for the increasing revenue deficit of the state.

(ii) Even within the permitted level of market borrowing (which itself would be lower for West Bengal as compared to other states, for reasons already discussed) there is no guarantee that West Bengal government can avail market borrowing to the fullest extent for the following reasons: the loans provided by the commercial banks to the state governments has varied inversely with the debt-GSDP ratio of the latter (RBI Report on Currency and Finance, 2002-03). This affects West Bengal the most, as it bears one of the highest debt-GSDP ratios in comparison to the other states. This is not only due to its compulsion to pay higher interest rates but also due to the recommendations of the Twelfth Finance Commission (TFC). The TFC has introduced a debt relief scheme for only those states which had enacted the Fiscal Responsibility and Budgetary Management (FRBM) Act . West Bengal is the only state in this country which has not implemented the FRBM Act-it bears one of the highest debt-GSDP ratios in comparison to other states. Thus even within the permitted level of market borrowing, the proportion of borrowing within that permitted level is likely to lower for West Bengal.

(iii) The RBI has undermined the state government guarantees by stating that these should not be a key consideration for loans to the public sector.

Thus the financial crunch of West Bengal is primarily due to its growing inability to access market borrowing and finance, per se. This, particularly in the wake of TFC recommendations of reducing Central loans to the states, makes the issue of financing of an altogether alternative trajectory of development, practically impossible, within the given neo-liberal paradigm, even for a state like West Bengal.

Let us now come to another aspect of the Centre-State financial relations. This is with respect to the interest rate of the National Small Savings Fund (NSSF). The interest rate charged by the Centre, on the NSSF, to the states has got two features:

(a) It is higher than the interest rates prevailing in the market.

(b) The rate is higher than that paid by the Centre to the small savers.

While (a) ensures that the average interest rates paid by the states is higher than that prevailing in the market, (b) ensures that the Centre lends high to raise its capital receipts, which allows the Centre can abide by its own FRBM Act. Now, fixing the interest rate for the state governments, over and above the market rate, leads to the following developments.

(1) Either the growth rate of income is lower than the interest rate or

(2) The growth rate of income is higher or equal to the rate of interest.

In the first case, interest rates being higher than the growth rate of income the debt of a state government, as a proportion of the GSDP, rises and along with it the revenue deficit as well (as a proportion of the GSDP). This again, as has already been mentioned earlier implies lower market borrowing according to the RBI rules. Thus, it becomes clear, that any shortfall of market borrowing with respect to revenue deficit has to be financed from somewhere. In the absence of Central loans this implies borrowing from external sources like the ADB and the World Bank with typical IMF conditionalities and hence acceptance of a neo-liberal framework.

On the other hand, any such situation can only be avoided if case (2) holds; i.e. the growth rate of the GSDP of a state is high enough to match the high interest rate that is being fixed by the Centre. In the absence of resources and access to finance, the state governments are being increasingly forced to go for private capital based corporate industrialisation.

ALTERNATIVES TO NEO-LIBERALISM

It is very evident from the above section that not only the Left Front government, but all other state governments are facing tremendous problems, at present. In fact, most of the state governments are being forced to adopt the neo-liberal policies. The acceptance of the FRBM Act by all the state governments, except the West Bengal government, was a manifestation of that.

Inspite of all these problems and challenges the Left Front government has been trying to provide alternatives, albeit in a much limited extent.

As has already been mentioned earlier that one of the essential features of neo-liberalism is the withdrawal of the state from major economic activities. Several critics have pointed out that the Left Front government has failed to provide any radical alternatives to the present industrialisation. In other words, the industrialisation programmes of the Left Front government are not much different as compared to other states. These critics, more often than not, do not take into the fact that the industrialisation programme of the Left Front government is based on the agricultural sector of the state. The implementation of the land reforms programmes coupled with de-centralisation of power has led to empowerment of the rural poor in the West Bengal countryside. According to the NSS figures, 84% of the beneficiaries of the land reforms programme are small and marginal farmers, which is highest among the states in India. The average growth rate of agriculture in West Bengal (3.6%), over the period 1993-94 to 2003-04, has been higher than the all-India average (1.53%). This has lead to a situation whereby the purchasing power of the rural people have increased manifold. According to the NSS data, the rural people of West Bengal are spending more than 20,000 crores of Rupees on industrial goods per year and the internal market has been growing at a rate of more than 8% per annum. It is in this context that the industrialisation programme is being carried out and this is where the strategy differs markedly from the other states of this country. This is due to the fact that apart from West Bengal, Kerala and Tripura no other state has undertaken land reforms programme in such a massive scale. Thus their industrialisation programme is not based on a solid agricultural sector. This is manifested by the large number of farmers’ suicides in all other states. The industrialisation programme of other states also does not take into consideration the creation of any internal market in the rural areas.

It is very much clear, from the previous section, that industrialisation programme cannot be carried out solely through government initiatives. In other words, private capital cannot be ignored while undertaking these programmes. The point is whether the public sector will be totally ignored or not. This is an area where the Left Front government stands apart from other state governments. Those governments have actually accepted the inevitability of private capital based industrialisation programme. It seems, from their attitude and policy statements that everything will be lost if private capital does not invest in their state. On the other hand, the understanding of the Left Front government is that the sick and closed down Public Sector Units (PSU) need to be revived to make the industrialisation programme a successful one. This, in other words, is a refusal of the inevitability of private capital based industrialisation. It is also a departure from neo-liberalism since that essentially entails withdrawal of the state. It is on the basis of this perspective that the Left parties and the West Bengal government had consistently pressurized the Union government for the rejuvenation and reopening of the IISCO factory in Burnpur. It is due to these pressures that the Union government has agreed to invest about 9,500 crores of Rupees for its modernization. A similar policy was adopted for other state government undertakings. Recently, two profitable PSUs, Coal India Ltd. and the DVC have reached an understanding for the rejuvenation of the MAMC factory in Durgapur. The state government is also trying to rejuvenate the Bengal Chemicals and Bengal Immunity factories located in the state. This type of orientation in the policy level is totally absent from the industrialisation programmes followed b other state governments.

Thus, the Left Front government is certainly providing some alternatives to the neo-liberal policies in following a path of industrialisation, albeit in a much limited extent. The limitation arising primarily due to the limited powers conferred on the state governments in the Constitution of India.

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1 According to this Act the government of a state will be mandated to reduce the revenue deficit by at least 0.5% and the fiscal deficit by 0.3% annually, as a proportion of the GSDP. Since the income earning capacity of the state governments are very limited, this Act, in effect, implies expenditure reducing policies and more often than not the axe falls on the developmental expenditures and social sector expenditures like health and education. This Act possesses a distinct neo-liberal feature in terms of withdrawal of the state from economic activities.