Kerala’s fiscal situation is in a crisis mode. Chronic revenue deficits compel the State to spend almost three fourths of the public debt to finance current expenditure, leaving very little for capital spending. Kerala is behind all States average in capital spending. With an acclaimed welfare model, the State has a very high component of revenue expenditure in its total spending with education, health and pension expenditure taking a very major share.
The state is often criticised for spending its revenue receipts on salaries and pension. This criticism, however, overlooks the fact that the state has to incur this burden for sustaining public intervention in social sector. Though generally correct, specifcities are too glaring to be swept under the carpet. The fast deteriorating quality, the secession of a large mass to private services etc. are staring at our face. The finance minister has been candid about it and has marked funds for quality improvement in education and health. He is aiming at international standards,
The public sector is not seen as an item to be sold to bridge the revenue or fiscal gap. It is considered as something to be nursed back to health and put to use for the benefit of the public. The pride of place Kerala Water Authority and Kerala State Road Transport Corporation got through well-thought out reforms to make them free of losses is a palpable indicator of this commitment.
The FM has plunged for big ticket capital spending through forming special purpose vehicles (SPVs) and earmarking tax revenues from specific sources like motor vehicle tax and cess on petroleum products to assure repayment of borrowings. Kerala with its crying need for infrastructure cannot wait for the revenue account to balance itself, which is simultaneously being attempted.
This is a daring attempt. Studies cited in Reserve Bank of India publications have empirically shown that the spending on infrastructure will be growth-inducing. With recessionary trends looming large across the world casting a shadow over inflow of remittances, this attempt will pump prime the state’s economy while spreading social security network by providing housing to all.
The FM has set the target of own tax revenue growth rate at 25 per cent, which is almost double the average growth rate of the last five years. The road map is also clear. Technological tools for data gathering to plug evasion will prevail over intrusive action. There has been rise in tax for certain items and also in stamp duty. In the crammed fiscal situation, the FM perhaps had the Hobson’s choice. The Achilles heel of the State finances is ballooning revenue deficits.
FM has clearly taken the revenue led route with emphasis on expenditure discipline while ensuring that welfare measures are not axed. Capital spending to boost economic growth and create a larger and sustainable resource base is intended to free the finances from the fragile dependence on remittances. The aim is to bring the fisc ‘from the brink to the back’, the task is clear.
(The author is a commentator on issues of Indian Federal Polity)
