West Bengal’s debt: Across the world, governments often rely on borrowing to finance development. Roads, ports, airports, and urban infrastructure require large upfront investments that cannot always be financed through current revenues. West Bengal is no exception. In recent years, the state has increasingly relied on market borrowing to finance both infrastructure creation and social expenditure. This has naturally revived an old debate – can debt-financed development deliver sustained prosperity, or does it merely postpone fiscal stress?
The recently announced Budget for 2026-27, with expenditure exceeding Rs 4 lakh crore, capital outlay of about Rs 86,000 crore and fresh market borrowing exceeding Rs 80,000 crore on the top of the outstanding public debt of more than 8 lakh crore, has once again brought this question to the forefront.
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Sustainability of West Bengal’s debt depends on growth
One of the simplest ways to understand this question is with the help of modern public economics. It argues that more than the absolute size of debt, what matters, is the growth rate of the economy. More explicitly, sustainability of debt depends on the existing stock of debt, the difference between the growth rate of the economy and the interest rate on government borrowing, and the primary fiscal balance of the government. For this reason, economists focus less on the absolute size of debt and more on the relationship between the cost of debt (interest payment) and economic growth.
When an economy grows faster than the interest to be paid, the debt burden becomes easier to manage over time. For instance, if a family’s income grows by 10 per cent annually while the interest payment on its outstanding loan is 7 per cent, the debt burden gradually becomes easier to manage. In contrast, if income grows by only 4 per cent while interest costs are 7 per cent, debt quickly becomes a source of financial distress.
The real challenge for any debt-financed development strategy is not borrowing itself but generating enough growth to sustain that borrowing. In this regard, development economists have long emphasized the role of building strong institutions for supporting high economic growth. West Bengal’s economic history suggests that the most significant constraint of the state in recent years has been the gradual deterioration of institutions supporting private investment and economic growth. The critical question for the state, therefore, is not whether the absolute size of the debt is increasing but whether the state will be able to carry out institutional reforms that supports private investment and long-term economic growth.
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Institutional reform must unlock private investment
While there is a long list of reforms needed to attract private investment and increase economic growth in state, the two most significant obstacles repeatedly highlighted by business organisations are making land available for productive investment and the persistence of the syndicate system. The failure of the past governments in both these fronts increased the cost of doing business, created uncertain investment climate and ultimately undermined investor confidence. While recognising these problems the state budget 2026-27 proposed to revisit the existing urban land ceiling legislations and formulate new legislation to take stronger action against syndicate practices, the real challenge runs much deeper.
The first challenge is political. West Bengal has long functioned as what political scientists call a ‘political society’ where citizens and businesses often gain access to state services through political intermediaries rather than through impersonal, rules-based institutions. In such an environment, syndicates are not isolated distortions, rather, symptoms of a larger system of political mediation. The second challenge is administrative. Reforms involving land administration, property rights and legal institutions are inherently complex. They need strong enforcement capacity of the state. When state capacity is weak, even well-designed reforms can fail.
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Sequenced reforms can make debt-financed growth viable
What is the solution? Institutional economists, fortunately, have long discussed these problems and provides solutions in the form of policy sequencing. They proposed to start with rather simpler reforms such as single window clearance, faster approvals, digitised services, streamlined procedures, and digitisation of land records which can be implemented even with limited state capacity. Once these reforms succeed in attracting private investment and accelerating growth, the high growth itself will strengthen both state capacity and political support for complex institutional reforms. More complex reforms involving changes in legal norms, property-rights institutions or governance structures can then follow.
The present challenge in West Bengal, therefore, is not the availability of finance or the burden of debt the state is incurring to finance the development projects but to gradually replace a system of politically mediated access of the government services with one in which citizens and business interact directly with transparent and predictable rule-based institutions. That transition is neither quick nor easy, but essential if West Bengal’s infrastructure push in the budget is to translate into sustained private investment and long-term economic growth needed to sustain the debt-financed model of development.
Debajit Jha is Professor, and Sunetra Ghatak is Associate Professor at Jindal School of Government and Public Policy, O. P. Jindal Global University.