With a day to go to present his tenth budget, Kerala Finance Minister, Thomas Isaac says that the floods that devastated the state in August has now hit its growth rate. With Kerala’s economy growing at 5% in 2018, it is at its lowest in three decades, and the state Finance Minister attributes this to the disaster.

In a candid interview with TNM, Thomas Isaac admits that the fiscal condition of the state is bad but remains optimistic that next year will be the turning point and Kerala will once again move to the path of fiscal consolidation. He is also hopeful that the revenue deficit, which decreased to 2.46% in 2017-18 from 2.51% in 2016-17, would be brought down to 1%, while the fiscal deficit ratio which was at 3.91% in 2017-18 will be kept at 3%.  

Thomas Isaac, however, tells TNM that he doesn’t expect any special package for the state and he hopes a new government will come in the Centre that is more sensitive to states in calamities.

How will the 2019-20 budget address the state’s reconstruction post the floods?  

We have successfully addressed the issues of immediate rehabilitation. Now we have to go to long-term strategy of reconstruction. It is not just reconstructing what was there. It is building back better. Now we have to learn from the lessons of the flood. The first lesson is we have to be much more sensitive to the environment. Second is we have to modernize -new types of buildings and roads are required. Modern technology needs to be brought in. And innovation is needed. Flood taught us that a lot of innovation is also needed.

Above all participation of people is important. The spirit of facing and addressing the floods should be carried forward into the reconstruction. Therefore, we are still discussing about how to do that. We have to negotiate for the loans and there are a lot of problems.

But how would fund mobilisation be done?

The Union government so far has not accepted our request that our Fiscal Responsibility and Budget Management (FRBM) limit be raised for public borrowing or at least consider multi-lateral agencies aid for flood reconstruction. This discussion is going on. But this is not the only source of funds. Basically, there are three sources. One is our plan, which we will still continue. We need Rs 30,000 crore to rebuild the state. This plan is given a tweak to address specifically flood-hit areas and flood related issues, particularly livelihood.

Second is KIFFBI- Kerala Infrastructure Investment Fund Board. We have a programme for mobilising funds through investment in infrastructure. So, around Rs 10,000 crore from the programme is going to be spent next year. Third is rebuild programme - details of which is not fully clear yet. All these three will contribute to the budget. So budget will be essentially bringing together these different streams and various schemes into a defined progarmmes which will be part of rebuilding Kerala.

The expenditure is growing at 16%, but revenue at 10% only?

This is a big challenge. We can’t be sustainable in this manner. At the same time given the problems Kerala is facing we can’t curtail the expenditure. You have to be in an expansive mode. Because of floods our growth rate is going to be the lowest in the last three decades. So you can’t afford to take a prudent behavior and cut down expenditure. But at the same time you want to go into fiscal consolidation. Therefore, our strategy is to push tax revenue growth by something like 30%. Now it looks astoundingly high, because our growth rate is 10%. That I think is because there is a tremendous leakage taking place. Once annual return comes and e-waybill system stabilizes, we will catch these guys. The money is not gone forever. Those who have taken additional credit they would be brought back, asked to pay off.

And that will enable me to bring down the revenue deficit to something to 1% and to keep fiscal deficit at 3%. It couldn’t have been realised, because revenues were not picking, we are not going in the mood to have an expenditure squeeze.  In Kerala it is not possible. The UDF government made a major squeeze of the expenditure and there was a public protest and they lost the 2006 election, and the Left came to power.

In 2013-14 onwards, revenues began to stagnate, our expectations was that GST would have been testing it out. And we haven't given up expectation. I still hope next year will be the turning point, Kerala will once again move to the path of fiscal consolidation.

So the fiscal condition is bad?

Yes of course I will be dishonest if I say a rosy picture.

"Because of floods, our growth rate is going to be the lowest in the last three decades. So you can’t afford to take a prudent behaviour and cut down expenditure. We want to go on fiscal consolidation." Kerala Finance Minister @drthomasisaac to TNM's @Sarithasbalan pic.twitter.com/lGJJxNTkeO

— Shiba Kurian (@shiba_kurian) January 30, 2019

What about your plan of 30% growth in tax collection, there are arrears to the tune of Rs 2000 crore?

That only shows that my scope of achievement is better. We will collect major portion of the arrears. There is legacy in the past.

GST calamity cess will lead to price rise?

 It will leave out lower rate commodities. The challenge is GSTN will modify its software to accommodate this. That we are not sure. The administration of the cess is a big issue.

What about an increase in borrowing limit for states?

The panel recommended by the Union government hasn’t yet accepted it.  I hope that a government will come in the Centre that will be more sensitive, more understanding to the states in calamities. There was a calamity and the state should be given the flexibility.

Do you expect a special package for Kerala in the Union budget?

I don’t think there will be any special package for Kerala. Kerala is not very much in their radar.