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The Debt Sustainability of West Bengal
This paper uses the indicator-based approach to assess subnational debt and the fiscal sustainability of West Bengal for the period 2000–01 to 2017–18. The period has been categorised into four phases based on debt sustainability. It is studied here how the state has moved from an “unsustainable” debt burden in the first phase (2000–01 to 2003–04) to more sustainable debt levels by the fourth phase (2010–11 to 2017–18), largely driven by the Fiscal Responsibility and Budget Management Act.
Different studies have used different approaches to assess debt sustainability. The four common approaches are: (i) the unit root approach (Trehan and Walsh 1991; Uctum and Wickens 2000), (ii) the co-integration approach (Hakkio and Rush 1991; Jha and Sharma 2004), (iii) Bohn’s model-based approach (Bohn 1998, 2005; Abiad and Ostry 2005; Greiner and Fincke 2009), and (iv) the indicator-based approach (uses Domar’s debt sustainability condition). The first three approaches analyse different empirical conditions to assess debt sustainability, whereas the “indicator-based approach” is an extension of the Domar condition,1 which analyses various macro-fiscal indicators (reflecting growth, liquidity, credit worthiness, fiscal burden, fiscal space, etc).
Traditionally, debt sustainability is assessed in terms of macro-fiscal indicators that broadly capture the ability of a state government to service its interest payments and repay its debt using current and regular sources of revenue. Alternatively, debt and debt service indicators are monitored to assess the relationship of existing debt to different types of expenditures, or as ratios to various fiscal balances, so as to gauge the sustainability of both the debt and fiscal situation (Rajaraman et al 2005; Maurya 2014; Kaur et al 2017).
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