State budgets are now far from mere revenue and expenditure statements. These are documents that investors, policy makers and researchers go through with a fine tooth comb to infer fiscal prudence and its sustainability. Now that we transition to debt-GDP ratio as the key fiscal anchor, states share an onerous responsibility. In this context, Kerala’s budget assumes added relevance.
The significant allocation towards social security pensions, Regional Rapid Transport System (RRTS) and roads unleashes consumption and investment multipliers, providing huge impetus to economic growth. As the state boasts of the highest inflation rate in India, hike in wages of Asha and Anganwadi workers, helpers, primary school teachers and cooks augment their real incomes and purchasing power - vital to growth for a consumer state like Kerala.
Going by the budget arithmetic, the tax revenue is projected to grow 12.2% which is higher than the nominal GDP growth rate of 11.5-12%. However, non tax revenue is assumed to grow at an even more ambitious 66%. However, the revenue assumptions appear to be optimistic. The fiscal deficit comes to 2.9% based on these assumptions but might exceed 3% if revenue assumptions do not hold true. Sticking to the fiscal glide path is, however, vital for credibility.
GDP growth is estimated to be 11.5-12% for FY27 but half of that is attributable to inflation, with real GDP growth expected at 6.1-6.2%. Meaningful debt reduction hinges on accelerating the growth pace. Debt to GSDP ratio -at 33-34%-is higher than the median for all states. Salary, pension and interest payments constitute approximately 60% of revenue expenditure which limits fiscal space for growth creating capital expenditure. For the recent period weighted average yield on bonds issued by Kerala was 7.27% implying a spread of 67 bps over the 10-year benchmark sovereign yield.
As the Centre tightens transfers by cutting down on guarantees and subsidies, faster pace of industrialisation and productivity driven growth alone can bring down debt burdens. States have to get more innovative on the fiscal front by improving the health of local self-government, urban local bodies and municipalities. Going forward, they would have to raise their own resource through innovative means like municipal bonds. Complacency on this front risks a debt trap which is a burden on the present and posterity.
Growth and fiscal health are imperatives for attracting global investments. Kerala has a unique talent pool scattered across the globe and other Indian states for employment and education. If their creative energies can be harnessed, there is no reason why it shouldn’t grow more than 7% in real terms. Fiscal health would then be a natural corollary of growth due to improved revenue collections.
This will catalyse the conversion of MoUs signed with global investors into reality.
The budget should set the stage for growth enablers so that industries, especially small and medium enterprises, flourish. Perhaps no other state is uniquely endowed with such an abundance of human and natural resources. It just needs to leverage this potential to forever live up to the tag of ‘Gods Own Country’.