The Covid-19 has appeared at a time when Kerala’s economy and finances are facing grave challenges. Of course, the Kerala government is doing everything possible to prevent a community spread. While acknowledging the massive efforts of the government, the fact cannot be overlooked that the package announced to combat the impact of the pandemic is a damp squib.
Economic activity across the state is dull and thousands of workers in the informal sector have lost jobs. There was a lot of expectation that the government would come out with a well-structured package that will give the much-needed impetus to economic activity. But the package belies such expectations.
The `20,000-crore package is unlikely to have any multiplier effect on the economy except providing temporary support to weaker sections for a few weeks.Free distribution of rice and wheat through the public distribution system, the `2,000-crore employment guarantee scheme to be implemented in April and May and the `2,000-crore loan to Kudumbashree fall under this category. There is nothing new in the timely disbursal of welfare pensions announced as part of the package. The single major component of the package is clearing the arrears amounting to `14,000 crore to contractors, individuals and families. To the extent that this amount comes back to the local markets in the form of expenditure, it will have some impact on the trade and transport sectors.
One expected the package to have some components for agriculturists, dairy, poultry and fish farmers. For these sections, the government could have announced some kind of cash transfers. It would have partially compensated the losses and encouraged them to continue the activity. Entrepreneurs in the MSME sectors are another category going through a tough time due to low demand, logistic and cash flow problems.
Many are facing shortage of raw materials. A significant section is now facing acute shortage of working capital. It will be difficult for them to kick-start their activities as and when the state gets over the crisis. On the face of it, it may appear that a government that is struggling to pay salary and pension does not have the wherewithal to implement a more generous package. The problem is that in Kerala, the societal perception is that government’s primary responsibility is providing employment to people. This perception assumes that others can wait.
The government could have come out with a larger package had it resolved that its employees and pensioners can wait for a few months, and do with a slightly lesser salary and pension. An across the board 20% cut in salary and pension would have saved around `10,000 crore for the package. But this kind of ‘unthinkable’ decision requires unusual political will. It is unimaginable for a government having an eye on the election in 2021. Kerala has been using the borrowed funds to meet revenue expenditure right from 1983-84. During the period 2000-01 to 2019-20, only 33% of borrowed funds were used for capital expenditure.
The remaining amount was used for paying salary and pension. In 2017-18, the salary and pension expenditure as a percentage of revenue expenditure of 19 major Indian states was 40.83%. In Kerala, it was as high as 62.98%. Our neighbour Karnataka spends only 23.83% on this count. It is an undeniable fact that ‘Kerala model of development’ owes a lot to high salary and pension expenditure. It also reveals the weakness of this model. It provides little flexibility to the government to face a crisis. The government is going to use `20,000 crore for the Covid-19 package out of the permitted borrowing limit of `25,000 earmarked for 2020-21.
Kerala has wasted the opportunity for fiscal discipline offered by the Fiscal Responsibility and Budget Management (FRBM) Act. The legislation was passed in 2003 but till date the state could not achieve the target in any of the years. The failure of the state to come out with a larger package is nothing surprising. A society long accustomed to free lunches cannot afford to ask for more.