ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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West Bengal Government Finances: A Critical Look

Despite having a mid-level per capita income and a not so unimpressive growth rate, West Bengal's finances have fared poorly on most parameters when compared with other states. Its tax to state domestic product ratio is the lowest and the revenue deficit the highest among all general category states. The state's tax performance is so different from that of other states that it is an outlier in the statistical sense. Alongside, the consumptionincome ratio is also low and the savings-income ratio is not very high. This suggests the need for a fresh look at the state's true level of development as well as examining whether low tax collection is a result of its style of governance.

Does Fiscal Deficit Influence Trade Deficit?

Economic theory provides two alternative hypotheses regarding the relation between the budget deficit and the trade deficit of a country. The twin deficit hypothesis claims that a budget deficit causes a trade deficit. At the other extreme, the Ricardian Equivalence Hypothesis (REH) rejects any possible relation between these two deficits. This paper undertakes an econometric exercise to study the impact of the fiscal deficit on India?s external accounts since the mid-1980s and finds an absence of cointegration between the two deficits. Further, an absence of cointegration between the savings rate and the fiscal deficit-GDP ratio also negates the REH in Indian circumstances. These findings suggest that the ratios of trade deficit, fiscal deficit and net savings randomly maintain the national income identity and that a high fiscal deficit has been sustained by a simultaneous and independent increase in the savings ratio. Given that the savings-income ratio is already at a high level, a further increase cannot be taken for granted. However, notwithstanding the absence of a twin deficit so far, the situation offers no scope for profligacy in fiscal behaviour, both for the centre and the states.
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