MANILA, PHILIPPINES - The Asian Development Bank (ADB) today approved a $400 million loan that will help the state of West Bengal in India break a cycle of debt and development spending cuts.
"Maintaining health, education and other social and economic programs is essential for the well-being and livelihoods of West Bengal people," said Hiranya Mukhopadhyay, Senior Public Management Economist in ADB's South Asia Department. "To have such higher, ongoing development spending, it's essential to put the state's finances on a sustainable path."
West Bengal is the fourth largest state in India, densely populated with more than 91 million people. The state government, however, is struggling to pay for essential spending on development given its low tax and other revenues. In the past, efforts to rein in the state budget shortfall have led to a cycle of cuts in development programs which have hurt the state's growth prospects and employment opportunities.
In the 2010-11 fiscal year, West Bengal had a high fiscal deficit of 4.1% of gross state domestic product. In an attempt to contain these deficits, the development budget was severely squeezed, undermining infrastructure development and economic growth. In turn, heavy borrowing to cover the deficit pushed the state's public debt to 40% of gross state domestic product.
In addition to the loan, ADB will provide a $700,000 grant to help the West Bengal government put in place reforms that will make spending more effective, boost revenues, and improve the management of its fast-growing public debt.
These reforms will include computerizing teacher salary payments, streamlining drug procurement to reduce costs, simplifying and modernizing tax payment and property registration systems to boost revenues and helping the state manage its debt more efficiently to avoid spikes in future debt servicing. More efficient public spending combined with improvements in revenue collection is critical for the success of the program.
The loan and the reforms are expected to allow development spending to rise to the India state average of 2.5% of gross domestic product. The program's emphasis on more efficiently targeted spending on health and education will particularly help women and children, who suffer the most from current service gaps.