As Kerala Finance Minister KN Balagopal presents the first full budget of the second Pinarayi Vijayan-led LDF government on March 11, he faces the uphill task of reversing the fortunes of a state hurtling towards an unprecedented financial crisis and steering it towards growth. Balagopal had presented a revised budget in June last year after the government assumed power in May.
The back-to-back floods in 2018 and 2019 coupled with the Covid-19 pandemic devastated much of the state’s economy, and the challenge before the government is to balance the mounting public debt and a sharp increase in revenue and fiscal deficits.
According to the 2021-22 budget estimates, the state would have an outstanding debt of Rs 3.27 lakh crore by the end of the current fiscal. Kerala, along with Punjab, Rajasthan, West Bengal and Andhra Pradesh, also has a high debt to GSDP ratio. It currently hovers around 38%, and could make further borrowing unsustainable, which is a major worry for economists and the government.
A report of the Comptroller and Auditor General for the period between April to September in 2021 said the Public Debt Receipts of the state increased by 80.61% while the debt repayment went up by 141.81%. The state’s expenditure till December 2021 stood at Rs 1.17 lakh crore, out of which Rs 44,900 crore was borrowed. B Alwin Prakash, chairperson of the fifth Finance Commission of Kerala, and former chairman of Kerala Public Expenditure Review Committee, said the borrowing is the highest since its formation.
"The CAG report implies that 38% of the total expenditure was met with borrowing. The state had witnessed an unprecedented fiscal crisis in the 1999-2000 fiscal too. At that time 37% of the total expenditure was met with borrowing," Alwin Prakash said, pointing out that the crisis may not be without precedent.
Another huge concern before the government is its decision to implement some recommendations of the 11th Kerala Pay Revision Commission, especially the hike salaries.The state is estimated to spend Rs 73,845 crore on payment of salaries, pensions and interests as per the budget figures for 2020-21. “Though the Pay Revision Commission had said that the burden caused by salary hike would be capped at Rs 6,000 crore, the government feels it would touch Rs 10,000 crore," Alwin Prakash said. The revision, which was implemented on July 1, 2021, had also recommended a hike in pensions adding to the burden. Alwin Prakash said that the revision can’t be justified in any way as the income of government employees and pensioners have not been affected by the pandemic.
“The biggest component of the state expenditure is salary. The second biggest is the spend on aided educational institutions, which is one-third of the total expenditure. The third one is pension. The total revenue of the state gets covered by these three and the rest of the expenditure is met by borrowing. Borrowing 38 % of the total expenditure is a high rate and it means that the state has to borrow money to meet the day-to-day expenditure as stated by the CAG report. The reality is that there is no money to meet even necessary expenditure” Alwin Prakash said.
Financial crunch in the state had forced the state government to impose treasury restrictions in 2021.Thomas Isaac, who held the Finance portfolio in the first Pinarayi Vijayan government (2016 to 2021) had repeatedly said that slashing the state's annual borrowing limit had aggravated the fiscal crisis of the state. The Union government is also yet to acceptthe states’ demand to extend the Goods and Services Tax (GST) compensation for five years. Finance minister KN Balagopal told the Assembly in October 2021 that around Rs 2,921.84 crore GST compensation is due to the state for the financial year 2021-22 . The GST compensation from the union government will end in June this year.
The fiscal situation in the state has not improved post the deluge in 2018. The financial crisis, however, had been brewing even before that. “Kerala has had a series of bad years even prior to the Covid-19-19. The pandemic only made it worse. The tourism sector had been continuously suffering losses for the past several years. If the sector fails to revive the state’s revenue will suffer and the revenue situation is going to be bad. It’s a vicious circle,” said D Narayana, Former Technical Advisor, State Planning Board told TNM. The revenue loss in the tourism sector, owing to the pandemic, is estimated to a tune of Rs 33,000 crore.
Alwin Prakash, however, said that the situation existed even prior to the deluge and blamed the crisis on poor fiscal management. A white paper issued by Thomas Isaac in 2016 showed that fiscal deterioration began during the time of the previous United Democratic Front government (2011-2016), he said.
The sharp decline in remittances from the non-residents during the pandemic has also proved costly for Kerala. “Unlike in the past, the NRKs now mostly are professionals, a major chunk of them don’t want to come back and hence are not sending money back home. In the past, a good part of their earnings used to be sent back to the state. The money now being sent to the state by NRKs is mostly used to repay loans and not spent in the market. It’s not going to be as it used to be, with huge remittances on which the state was heavily dependent,” Narayana said.
Both Alwin Prakash and Narayana opined that the government should have a rethink on the pay revision it implemented.
“The government should actually go back as the situation has changed because of the pandemic. Already, there is a reduction in central transfers. If we don’t show the prudence to do this now, there would be just enough money to pay salaries and pension. The state faced this situation in the 2021-22 and it would continue this year too. In the last few years, other states were able to bring down revenue deficit to zero as per the FRBM (Fiscal Responsibility and Budget Management) requirement. But in Kerala, it continues to be around two per cent of the GST. This means whatever the state borrows would go for day-to-day business, leaving very little for any capital investment. This is quite serious,” Narayana said.
According to him, there is also the need to maintain a ratio between the total expenditure and SIP (Salary, Pension, Interest Payment) “Once the revenue is not enough to pay the SIP, the rest of it has to be borrowed. This will make the revenue deficit go up. There is the other side of it. When the debt goes up, the interest payment also goes up, this would again add up to the SIP. In such a situation, only discretion is about the salary and pension. Without this, I don’t think the finance minister would be able to manage the finances,”Narayana said. In Kerala, the SIP component is 80% of total revenue and 60% of total expenditure. “Prudent fiscal behaviour is running a surplus in a revenue account which should be used for capital expenditure, Narayana said, adding that an ideal Expenditure-SIP ratio however depends on several parameters.
Dr Nagaraja Naidu, a former member of the Public Expenditure Review Committee, said the government can implement the pay revision in ten years instead of five years. “Making the revision in ten years will give the government the time to focus on development activities. There is no point in arguing for reducing salary because the efficiency also depends on how much a person is paid,” he said.
Other suggestions by Narayana for increasing the revenue include a hike in electricity duty — a duty on electricity charges—collected by the Kerala State Electricity Board Ltd (KSEBL) from consumers, which is currently one of the lowest in India and tapping revenues from land registration fees and stamp duty. “It’s not as if the state doesn’t have resources. Only that we don’t manage our finances well. Electricity duty is a sure source of revenue, which would come to around Rs 4,000 to 5,000 crores. The land fair value should also be revised, which would have an impact on revenue from registration and stamp duty,” he said. The revenue from land tax for the state in the last fiscal was only Rs 400 crore.
Nagaraja Naidu says the government should focus on expenditure management. ‘Prudent expenditure management is needed to tide over the fiscal crisis. Also, the state has to emphasise more on the growth strategy; that is the only way forward. In the budget, the focus should be shifted from short-term populist programmes to a long -term growth strategy. Resources have to be augmented,” Naidu said. He is of the view that the budget would focus on tapping non-tax revenues.