West Bengal’s debt near 40% of GSDP, interest payments account for 21% of revenue, says NCAER paper
A working paper by the National Council of Applied Economic Research (NCAER), prepared for NITI Aayog, found that West Bengal's outstanding debt stood at nearly 40% of its Gross State Domestic Product (GSDP) in FY 2024-25, well above the all-India state average of 28.4%.
Interest payments consumed an average of 21% of the state's revenue receipts over FY 2015-16 to FY 2024-25, compared to a 12.8% national average and 4.8% in neighbouring Odisha over the same period.
The paper attributed the fiscal stress to weak own-revenue mobilisation (the state finances only about 35% of expenditure from its own revenue, relying on central transfers for 56.2% of revenue receipts against a 45% national average), a shrinking industrial base, and low capital outlay (1.6% of GSDP versus 2.3% nationally and 4.6% in Odisha).
The paper recommended stronger tax and non-tax revenue mobilisation, improved debt management, and greater capital investment, alongside diversification into manufacturing, logistics, and tourism.
FRBM Act and State-Level Debt Targets
The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 requires the Centre and states to maintain fiscal discipline through legislated deficit and debt limits, enforced at the state level through parallel State FRBM Acts. The FRBM Review Committee (chaired by N.K. Singh, report submitted January 2017) recommended a combined general government debt-to-GDP ceiling of 60%, split as roughly 40% for the Centre and 20% for states, to be achieved as a medium-term glide path.
Key Details
- FRBM Act, 2003 (Centre) mandates fiscal deficit and debt reduction targets; states enact their own FRBM legislation under the same framework, typically capping annual state fiscal deficit at 3% of GSDP (extendable under conditions linked to power sector reforms and capital expenditure, per recent Union Budgets).
- N.K. Singh Committee (2017) recommended a 20% debt-to-GSDP target for states collectively, as part of a 60% combined general-government debt ceiling by around 2022-23.
- West Bengal's ~40% debt-to-GSDP ratio is roughly double the committee's suggested state-level benchmark, indicating a persistent breach of the recommended fiscal glide path.
- The 15th Finance Commission (2021-26 award period) also flagged high-debt states for closer monitoring and linked a portion of additional borrowing room to specific reform conditions (e.g., power sector reforms) under Union Budget provisions.
The NCAER paper's finding that West Bengal's debt is nearing 40% of GSDP — against a recommended 20% state-level ceiling — illustrates the gap between FRBM-era fiscal rules and actual state finances, a recurring theme in Finance Commission and NITI Aayog fiscal federalism assessments.
Own Tax Revenue vs Central Transfers — Vertical Fiscal Imbalance
Indian states typically depend on a mix of own tax/non-tax revenue and Central transfers (tax devolution via the Finance Commission plus Centrally Sponsored Schemes and grants) to fund expenditure. A state's "own revenue effort" — its ability to raise resources independent of the Centre — is a key indicator of fiscal health and administrative capacity used in Finance Commission and NITI Aayog assessments.
Key Details
- West Bengal finances only ~35% of its expenditure from own revenue, with central transfers making up 56.2% of revenue receipts (against a 45% national average) — indicating higher-than-typical dependence on the Centre.
- Vertical devolution share of the divisible pool recommended by the 15th Finance Commission (2021-26): 41% to states (reduced from 42% under the 14th FC to account for the reorganisation of Jammu & Kashmir into Union Territories).
- Horizontal devolution among states uses criteria including population (2011 Census), area, forest cover, income distance, tax effort, and demographic performance — "tax effort" specifically rewards states that mobilise higher own revenue relative to their fiscal capacity.
- Low industrial share of Gross State Value Added (22% for West Bengal vs 29% nationally) is cited as a structural constraint on the state's own-tax base, since manufacturing/industry typically yields higher and more stable tax revenue than an informal-heavy services sector.
The paper's diagnosis — weak own-revenue mobilisation and heavy reliance on central transfers — is a textbook illustration of "vertical fiscal imbalance," a standard concept in Indian fiscal federalism regarding the mismatch between states' expenditure responsibilities and their independent revenue-raising powers.
Capital Outlay and Quality of Expenditure
Capital expenditure (capital outlay) creates durable assets (infrastructure, buildings) and has a higher fiscal multiplier than revenue expenditure (salaries, subsidies, interest payments), making the capex-to-GSDP ratio a widely used indicator of the "quality" of a state's spending mix in fiscal federalism analysis, including by the Finance Commission and NITI Aayog.
Key Details
- West Bengal's capital outlay averaged 1.6% of GSDP (2015-16 to 2024-25) against a 2.3% national average and 4.6% in Odisha over the same period.
- High interest burden (21% of revenue receipts) and elevated subsidy expenditure (7% of total expenditure in FY 2024-25, double Odisha's share) were identified as crowding out capital spending — a classic "debt-interest-subsidy trap" reducing fiscal space for investment.
- The Union government has incentivised state capital expenditure through the Special Assistance to States for Capital Investment scheme (50-year interest-free loans), tying disbursement partly to capex performance and reform milestones.
The NCAER paper links West Bengal's low capital outlay directly to its high debt and interest burden, framing the state's fiscal stress as a self-reinforcing cycle: high debt → high interest payments → less room for capital spending → weaker growth and revenue base.
- West Bengal debt-to-GSDP (FY 2024-25): ~40%, vs 28.4% all-India state average.
- West Bengal interest payments as share of revenue receipts (FY 2015-16 to FY 2024-25 average): 21%, vs 12.8% national average and 4.8% in Odisha.
- Own revenue finances only ~35% of West Bengal's expenditure; central transfers form 56.2% of revenue receipts vs 45% nationally.
- West Bengal capital outlay: 1.6% of GSDP vs 2.3% national average and 4.6% in Odisha (2015-16 to 2024-25 average).
- West Bengal subsidy expenditure: 7% of total expenditure in FY 2024-25 (double Odisha's level).
- West Bengal industry share of gross state value added: 22%, vs 29% national average; services sector share: 57%.
- N.K. Singh (FRBM Review) Committee recommended state-level debt ceiling: 20% of GSDP, as part of a 60% combined general-government debt target.
- 15th Finance Commission vertical devolution to states: 41% of the divisible pool (2021-26 award period).