Kerala economy stares down barrel

The paper, tabled in the assembly, warned that the state was headed for a financial crisis and blamed the previous UDF Government under Oommen Chandy for the mess. 

Published: 25th August 2019 09:23 AM  |   Last Updated: 25th August 2019 09:23 AM   |  A+A-

Economy crisis

For representational purposes (Express Illustrations)

Express News Service

KOCHI: Immediately after coming to power in May 2016, the LDF Government’s Finance Minister T M Thomas Isaac, an economist, presented a white paper on Kerala’s fiscal health.

The paper, tabled in the assembly, warned that the state was headed for a financial crisis and blamed the previous UDF Government under Oommen Chandy for the mess. 

The public debt nearly doubled from Rs 78,673.24 crore to Rs 150,000 crore in the five years from 2011 to 2016.

The revenue deficit and fiscal deficit at Rs 8,199.44 crore and Rs 15,888.17 crore, respectively, are also ballooning. Another cause for worry is Rs 10,000 crore of taxes which were outstanding but not collected, the paper said. 

If the situation continued, the state would be in a “financial anarchy”, Isaac said.

Three years and two months later, a look at Kerala’s balance sheet shows Isaac has not only miserably failed to stop the deteriorating finances but more alarmingly the treasury is in a far worse position than it was when the LDF assumed office.

Consider this: Kerala’s fiscal deficit has risen to Rs 23,957.06 crore in 2018-19 and revenue deficit to Rs 12,859.81 crore. At 3.4 per cent, Kerala’s fiscal deficit has overshot the FRBM (Fiscal Responsibility and Budget Management Act) target. Under the FRBM, the fiscal deficit of states should be below 3 per cent of the Gross State Domestic Product (GSDP). 

There are warning signs on other fronts too. Kerala’s unemployment rate is the highest in India at 12.5 per cent, after Tripura (19.7 per cent) versus Gujarat (0.9 per cent), Chhattisgarh (1.9 per cent) and Karnataka (1.5 per cent).  

To be fair to Isaac, some developments on the fiscal front were completely beyond his control. For instance, two consecutive years of flood and landslides have wrecked the already weak finances of Kerala. 

GST collection expectation misfires 

The big expectations from GST, which misfired, also contributed to the state’s broken finances. The Finance Minister was hoping for at least a 20-25 per cent increase in tax collection under the new Goods and Services Tax (GST) regime.

But in reality, the tax revenue increased only below 10 per cent, a big letdown as far as Kerala is concerned. 

Says Jose Sebastian, professor at the Gulati Institute of Finance and Taxation, Thiruvananthapuram, “Kerala’s expectations about GST, based on the size of its service sector, is unrealistic. From the revenue point of view, what matters is not the absolute size of the service sector, but the presence of taxable services and size of the service providers.” 

One of the major sources of service tax revenue is services associated with manufacturing activity, where Kerala’s share is a mere 1.30 per cent while the six manufacturing-oriented states accounted for nearly 63 per cent. 

The fastest-growing segments of Kerala’s service sector such as education and health are exempted under GST, making it clear that the state will not benefit much from the new tax regime, reckons Sebastian.

Remove subsidies in higher education and healthcare 

Mary George, economist and former head of Kerala public expenditure review committee, blames lack of courage on the part of the successive governments to find new sources of revenue for the current financial crisis. 

For instance, the college teachers, who earn UGC-scale salaries, and the government employees, get all the perks but get highly subsidised education for their children at government medical colleges and engineering colleges. 

The story is the same in healthcare and transportation, where the rates have not been revised upwards commensurate with the rise in wages.

 “While the poor could access subsidised education, there is no justification for highly subsidised education and healthcare for someone who is earning `1 lakh and above per month,” she explains. 
Kerala’s per capita wages, salary (`8,291) and pension (`4,449.15) are the highest among the major states -- Punjab (`6,849.92 and `2,765.64) and Andhra Pradesh (` 6,309.15 and `2,496) occupy second and third positions.

Liquor and lottery hit the floor

Though Kerala has a wide tax base covering various sections of people and different kind of economic activities, it does not reflect in revenue mobilisation.

According to Sebastian, the revenue base has been getting narrowed down to four items - petrol and petroleum products, liquor, motor vehicles and lotteries. 

Small wonder, while the government employees and the salaried class get the cake and eat them, there are no such mercies for the poor. On the contrary, the government penalises the poor through high liquor taxes and lottery ticket sales.
Sebastian points out that by allowing quarrying across the state on a massive scale, the government supports the construction lobby and the rich while the poor and the marginalised bear the brunt of its ill-effects as witnessed in the recent landslides in Idukki, Wayanad and Malappuram. Adds Mary George: “Thiruvananthapuram and Ernakulam districts, where the crushed rock and sand are widely used for the construction of flats and buildings, are not affected by nature’s fury.” 

Remittance not resulting in spending 

Remittance by about 22 lakh expatriate Malayalees, most of them in the Gulf region, have been a big source of booster for Kerala’s economy in the last several decades. 
However, dwindling job opportunities for expats in recent times have also affected the state’s economy of late. 

Divya Balan, assistant professor, International Studies at Pune-based FLAME University, who is closely studying the Gulf region, reckons the money from the existing group of people working in West Asia will continue to pour into Kerala.

However, she says there has been a considerable decline in spending by the expatriate Malayalees back home in recent years.

“If you look at the shopping malls in northern Kerala, they are either being closed down or there is a significant decline in footfall,” she said.


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  • ARN

    Mary George - What is the logic for this comment - "While the poor could access subsidised education
    2 years ago reply
  • Sankara Menon

    We must understand that Kerala in the present form is an unviable State. Let us go to the previous state of Travancore kochi and Malabar going to Karnataka and Tamil Nadu. We can take back Nagarcoil and Kanyakumari plus Thirunelveli. It will solve fiscal as well as many socio-political problems.
    2 years ago reply
  • Sandeep

    Poor is being penalised for drinking more..what kind of reason it is? If the poor wants they can stop drinking. Right? Drinking is not a necessity. Right? So what is the next plan...reduce taxes for liquor and increase the fee in govt engineering colleges and medical colleges...still you cant think of creating industries...the only solution is mining
    2 years ago reply
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