Some Aspects of Debt Sustainability and Fiscal Fatigue in West Bengal

Abstract

One major problem plaguing the economy of West Bengal is her large Public Debt. The state in order to implement fiscal discipline has formulated her own Fiscal Responsibility and Budget Management Act in 2010 and have amended it multiple times to allow for higher deficits and debt level, heedless of the mandates of Union Government and Finance Commissions. In this context, this article tries to assess the sustainability of West Bengal’s public debt using four alternate methodologies popular in literature- Domar’s Approach, Unit Root and Co-Integration Approach (Hamilton’s and Flavin’s Approach), Penalized-Spline Approach (modified Bohn’s Approach) and lastly Threshold Approach to check for the presence of Fiscal Fatigue. It conjectures that while Domar’s and Hamilton’s Approaches indicate unsustainable level of debt; Bohn’s Approach indicates sustainable debt level at 5% but not at 1% level of significance. Using Threshold Analysis, we find evidence of Fiscal Fatigue. West Bengal’s threshold debt level is below the threshold level as per the state’s FRBM Act, but not as per the mandates of Union Government (FRBM Review Committee’s) and 12th and 15th Finance Commissions’ mandates. The study also finds that the state tends to profligate whenever the debt is below the threshold level and practices austerity when debt surpasses the threshold level.