The acute fiscal stress that Kerala is undergoing now is the logical culmination of the fiscal policies the state has been pursuing for the last 30 years. The state is in need of an urgent course correction. Bold decisions and innovative thinking alone can break the vicious circle in which the state is entrapped. The solution, of course, is mobilising more public resources and effective utilisation of public assets.
The foremost constraint in this context is the mindset that competitive populism of successive coalition ministries created in the Malayalee psyche. The fact that the government is an entity functioning with peoples' contribution and public services come with a cost is often forgotten. This mindset rendered public resource mobilisation a difficult proposition in Kerala. In 1970-71, Kerala's share in the total own revenue mobilised by all states and union territories was 4.46 per cent. Now in 2013-14, Kerala's share is only 4.30 per cent. During this period, the capacity of the people to contribute towards public purposes registered manifold increase.
It is high time that the political class in Kerala stops this self-defeating deception. Let us hope Finance Minister Dr Thomas Isaac, who is also a well-known economist, has the audacity to tell the people on their face that he is here to mobilise public resources; so that he will have no dearth of ideas. This does not mean across-the-board raising of tax rates. At the going rates itself, there is considerable potential for additional resources. But this cannot be tapped through administrative measures alone. The fiscal urgency has to be communicated to the people in unequivocal terms.
A statewide campaign should be unleashed to create fiscal consciousness in society. It is such an environment that forces trading community to comply with tax laws voluntarily. The present approach of collecting taxes through heavy reliance on legal measures, border check-posts, search and seizure etc should give way to a culture of voluntary tax compliance. Overdependence on tax sources and within tax sources, on indirect taxes like sales tax and value added tax, is the bane of Kerala's revenue system.
Over the years, the share of direct taxes like agricultural income tax and land revenue has drastically come down. Motor vehicle tax should be used as an effective instrument to reduce proliferation of vehicles and the attendant evils. Households owning more than one four-wheeler can be taxed at a higher rate. There is considerable scope for mobilising revenue from non-tax sources. The share of non-tax sources in Kerala's own revenue structure came down from 43.5 per cent in 1960-61 to 17.13 per cent in 2014-15. Lottery accounts for 74.55 per cent of non-tax revenue. One major source of non-tax revenue is the fee levied on the services provided in the health and educational sectors.
The revenue receipt was 6.89 per cent of the revenue expenditure on this sector in 1971-72. In 2013-14, it has come down to 2.69 per cent. The huge subsidies flowing to the middle class and rich can be arrested through proper targeting using Aadhaar. Rationalising the lease rent on government land and raising the royalty on mining and quarrying are other sources of non-tax revenue.
Paradoxically, Kerala's public finances have an in-built bias against the poor and marginalised. Of the total own revenue, 32.71 per cent comes from liquor and lottery. The state levies 135 per cent sales tax on liquor over and above excise duties to discourage consumption. There is no compulsion on anybody to purchase lottery. By pretending to protect this class, the government is actually siphoning of resources from it.
But public expenditure is heavily tilted in favour of the middle class and rich. It is time the Finance Minster does something to correct this bias. One way to mobilise more public resources is to leave enough purchasing power with the poor and downtrodden. He should know that both in business as well as in government, bottom of the pyramid counts.
(*Jose Sebasiatn is with Gulati Institute of Finance and Taxation. The views expressed are personal.)
