A way out of Kerala’s fiscal vulnerability

Rising additional borrowing along with a growing level of outstanding debt, off-budget borrowing and growing collateral predict a bad situation, but there could be solutions

Rising additional borrowing along with a growing level of outstanding debt, off-budget borrowing and growing collateral predict a bad situation, but there could be solutions

Kerala’s tax problems have been in the news for several years now. The dramatic impacts of the two floods (2018 and 2019) and the COVID-19 pandemic have aggravated the situation. In this context, the obscure assertions and counter-positions on the political spectrum of Kerala regarding the management of the state budget demand objective examination. A recent study by the Reserve Bank of India (RBI Bulletin, June 2022) on the fiscal vulnerability of Indian states conducted against the backdrop of the Sri Lanka defaults crisis in May 2022 identified Kerala among the five most vulnerable states. indebted countries of India, the others being Punjab, Rajasthan, Bihar and West Bengal. This article attempts to shed some light on Kerala’s fiscal vulnerability and offers some suggestions for improvement.

Understanding tax stress

In a growing economy, debt is not a sin and only becomes a problem when it becomes unsustainable. A government is vulnerable when it struggles to effectively meet its fiscal obligations. According to the 2022-23 budget, Kerala’s public debt to GDP ratio is 37.2%, which is clearly high, especially compared to the average of 14.6% for the decade 1981-91. The fact that the Fourteenth Finance Committee set the upper limit at 25% highlights the vulnerability. Only Kerala, Jharkhand and West Bengal have passed the debt target stipulated by the Fifteenth Finance Committee (FC-15). The fact that the rate of return to be paid for special development loans issued by the state and auctioned by the RBI is set at a high level (8.3% in 2018-19 and around that now) maintains Kerala in a bad light. The increase in additional borrowing as well as the rising level of unpaid debts, off-budget borrowing and growing collateral portends a bad situation.

Kerala has already violated several tax norms. Over the past five years, Domar’s famous stability rule – that the inflation-adjusted interest rate must be lower than the growth rate of the GSDP – has been broken except for 2019-20 and 2020-2021. . The condition that the increase in the nominal GDP growth rate must be greater than the debt growth rate is also violated. Over the past 10 years, from 2013-14 to 2022-23, with the exception of two years, the rate of debt growth has exceeded GDP growth. The state’s growth momentum needs to be studied closely given its admittedly high per capita consumption, high savings (bank deposits in March 2021 were over ₹6.05 trillion, with a non-resident Indian component of ₹2.29 trillion) as well as its low investment trajectory.

The increase in the ratio of interest payments to income (IP/RR) from 16.86% in 2014-15 to 21.49% in 2020-21 and to an estimated 19.36% for 2022-23 does not point to a healthy situation. If we accept the FC-14 IP/RR cap of 10%, surely Kerala is on a sticky wicket. The mobilization of own tax revenues must be considerably improved to save the situation. In 2010-2011, Kerala’s own per capita tax revenue was a remarkable ₹6,521, while the average for all states was ₹3,278, almost 100% less. However, for 2020-2021, Kerala’s per capita tax is ₹12,929 with an all-state average of ₹9,162 with the difference falling to 41%. Clearly, Kerala’s fiscal effort has not improved compared to that of other states. Kerala’s own tax revenue for 2020-21 at ₹47,661 crore was lower by a whopping margin of ₹2,662 crore compared to 2019-20. The 2021-22 (RE) shows a shortfall of ₹13,465 crore against the budget estimate. The budgeted tax revenue for 2022-2023 of ₹74,098 crore is unlikely to be achieved. The state’s fiscal performance leaves much to be desired.

The fact that the budgeted non-tax revenue of ₹11,770 crore for 2022-23 is ₹495 crore lower than the actual amount for 2019-20 is worrying. The insinuating assertion by some that the state government is heavily dependent on lotteries is untenable. In the pre-COVID-19 period 2019-20, the income from lotteries was ₹9,973.67 crore but the related gross expenditure was ₹8,475.3 crore with a net income of only 1,498.3 crore ₹; the corresponding figure in the current budget is only a measly ₹77 crore. That the 133 public sector enterprises with an investment of ₹20,025 crore (as of March 31, 2018) could only contribute a sum of ₹110 crore in 2019-20, and even in 2022-23 (BE) only ₹257 crore to the own-source revenue pool, tells a dismal story.

Decline in capital formation

The quality of spending is a critical variable because it reflects prudent budget management and good governance. The budgetary norm of generating a revenue surplus is next to impossible for Kerala, with huge expenditures incurred comprising salaries, pensions and interest payments, which in 2017-18 reached 80.5% of government expenditure. total revenues and currently stand at 70.7%. A five-year review of salaries and pensions as well as an indexation clause to protect the real income of civil servants go hand in hand with practices such as the granting of a pension to the staff of ministers for a minimum service of two years ( which should no doubt be extended to all civil servants) etc. and can only comfortably exist in Alice’s Wonderland. It is therefore not surprising that the fiscal space for development spending in Kerala, at 51% (five-year average, 2017-22), is much lower than that of Madhya Pradesh (73.4%), Rajasthan (71.4%) and Bihar (71.3%). ) — details can be found in the RBI Bulletin, June 2022, p.119.

There has been a visible decline in capital formation in crucial sectors such as education, health, infrastructure, agriculture, etc. To be warned is to be warned. Although the given analysis suggests solutions, the results of persistent social failures and political miscarriages must be taken into account for any rational reconstruction. Rentier politics, endemic corruption, ecological overexploitation, pathological disregard for the rule of law, visible decline in the tradition of public action and public reasoning, decline in the quality of public services such as health, sanitation, solid waste management, higher education and roads (the ubiquitous potholes are outrageous), widespread drug abuse and alcoholism, rise in preventable deaths, and more. cannot be solved by public relations people, only by informed social choices.

Course correction for the State

To increase its own sources of revenue, the state needs to streamline its tax administration to reduce arrears and fraud and tap into its huge non-tax revenue potential. The property tax could have easily been doubled. Non-tax revenues can be increased by increasing user fees and charges as well as visibly improving quality. Without a noticeable counterpart in the services, users will naturally resist hikes. The dividend of public sector companies can be increased if there is effective rationalization of management. Unbundling land values ​​can generate good revenue. The Kerala State Road Transport Corporation (KSRTC) is a grindstone around the tax pass of Kerala. Monetization of KSRTC land values ​​and assets as well as management restructuring can be a solution. Allowing private universities with world-class standards can stop the exodus of bright students. Why Kerala, with a fabulous influx of funds since the mid-1970s, has failed to be a happy place for the enterprising private sector to create wealth for the state is a debatable question for which honest answers escape us. Meaningful pension reform, including raising the retirement and hiring ages, can bring about big changes. If the government of Kerala wants to get its finances in order, it must experiment with zero-based budgeting or at least performance budgeting with determination. Departments need to significantly improve their accountability.

In India’s federal fiscal system, with gaping mismatches between resources and responsibilities, all intergovernmental transfers must be prescriptive and formula-based. Central transfers are rights and certainly not largesse. That 35% of transfers are still outside the Finance Commission is contrary to the canons of cooperative federalism.

In sum, Nava Kerala cannot be built on a weak tax office, and rhetoric is not a resounding solution.

MA Oommen is an Honorary Fellow of the Center for Development Studies, Thiruvananthapuram and an Emeritus Fellow of the Gulati Institute of Finance and Taxation, Thiruvananthapuram

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