Kerala budget: Expectations, setbacks and the reality

Kerala's fiscal scene entered into a phase of revenue imbalances from the second half of the 1980s. Despite a strong economic growth, the revenue imbalances continued and widened in the period between the second half of 1990 and the first half of 2000. After this, there was a movement towards fiscal consolidation.

The present deterioration began in 2013-14 and has continued. The growth rate of the economy has been below the national growth rate from 2012-13 and own tax revenue growth rate has come down from around 18-20 percent during 2006-07 to 2012-13 to 6-10 percent from 2013-14 to 2017-18. In the revised estimates of 2018-19, it is estimated to grow around 14 percent and the budget estimates for 2019-20 has pegged the growth rate at 23.86 percent.

As the finance minister candidly stated in the budget speech, this is an ambitious target, which would be criticised as impracticable. Such criticisms are bound to be there. There is very big optimism on self- compliance, enforcement capacity and success of amnesty schemes. If one aims at the stars, she/ he can hit at the trees. This is good enough in times of slowdown of revenue growth.

 The minimum required growth for balancing the revenue account is 20 percent growth rate of own tax revenue. Can we achieve this is the most important question. The central  government is planning to reduce GST rates and in all probability would try to push it in the GST council.

The main Opposition party, Congress, also wants reduction in GST rates.These are superficially appealing, but if they become a reality, the state finances would be stressed substantially.

Our GSDP growth rates are down and inflation is also lower. If GST rates also fall, the state will face the trilemma of low GSDP growth rate, lower inflation (which affects revenue collection growth) and lower standard rates of GST. To come out of this, the three-pronged strategy could be higher revenue growth, rationalising revenue expenditure and increasing capital spending. The last one is conditional on the first two as there is a ceiling on overall borrowing for a year, which is called fiscal deficit. Off budget borrowing routes like KIIFB would also be sustainable only if the imbalances in revenue account, which is presently around Rs 13,000 crore, are corrected. Off budget borrowings are to be guaranteed by the government and can become a spectre haunting the Consolidated Fund of the State in the near future, if the imbalance in revenue account persists.

The growth rate of revenue expenditure is moderating to around 10 percent which is lower than the long run average growth rate of 13.88 percent during 1987-88 to 2016-17. Even if we achieve a revenue receipt growth of 18-19 percent, fiscal situation can be consolidated if the revenue expenditure growth persists at 10 per cent. This is an arduous task in the post-flood scenario, especially when plan size is incrementally growing along with a deficit in non-revenue account (the latter is projected to become positive in 2019-20 budget estimates).

The optimism of the finance minister in a hamstrung situation is welcome. He is aiming high to achieve fiscal consolidation. We can hope that his estimates become a reality, if not wholly, at least substantially.