In the wake of the ongoing financial crunch faced by Kerala, Dr Jose Sebastian, an expert in public finance and taxation, speaks to TNIE on the crisis and possible solutions. Dr Sebastian is also a former faculty member of the Gulati Institute of Finance and Taxation, Thiruvananthapuram.
How do you view the latest bout of fiscal crisis Kerala is going through?
I would like to view this as an opportunity, just like the saying ‘every threat is an opportunity’. For Kerala, fiscal crisis is nothing new. It dates back to the mid 1980s. Dr K K George (economist) wrote the famous paper “Kerala’s Fiscal Crisis: A Diagnosis” in 1990. Though he arrived at a wrong diagnosis, there began serious academic engagements on Kerala’s persisting crisis. It is high time Kerala fixes it. So, this is an opportunity.
Don’t you think the crisis is a result of Centre’s unfair slashing of Kerala’s right to avail the permitted borrowing?
Kerala was warned time and again that it cannot borrow beyond the limits set by the 15th Finance Commission. Instead of mobilising resources or cutting down expenditure, what the state has been doing all along is to circumvent this limit left and right.The Comptroller and Auditor General had warned against off-budget borrowings like Kerala Infrastructure Investment Fund Board and Kerala Social Security Pension Ltd. The state should have taken corrective measures rather than searching for ingenious avenues for incurring more debt.
But the Centre, which professes fiscal discipline to states, is itself violating the limits of Fiscal Responsibility Budget Management (FRBM) Act?
Fiscal capacity and mandates of the Centre are different from that of the states.The Centre has the mandate of ensuring fiscal and monitory stability of the country. In a globalised scenario, it has to consider economic trends across the world and its impact on country’s balance of payment and stability of the currency. Domestic resource mobilisation and expenditure policies will have to be tailored to these developments. This warrants occasional deviations from the fiscal roadmap of FRBM Act. Besides, the fiscal capacity of the Centre is enormous. While the Centre can be allowed occasional deviations from the roadmap prescribed by the FRBM Act, states cannot claim this liberty as a right. If all 29 states do so, the fiscal stability of the country will be in jeopardy.
What is the root cause of Kerala’s present precarious situation?
It is nothing but the pay revision of 2021. Salary and pension expenditure which was Rs 46,671.14 crore in 2020-21 shot up to Rs 71,392.86 crore in 2021-22. This increase of Rs 24,721,71 crore or 52.97% is unaffordable for a state like Kerala which has been running deficits for decades. Its root cause is the ruling class’ temptation to ensure a consecutive second term. The state had enough reasons to ward off the displeasure of service organisations. If two floods and the pandemic were not sufficient, there was the recommendation of the last pay commission that pay revision should be done once in 10 years.
What is the solution to the present impasse?
Mobilising more resources and a thorough restructuring of expenditure. Fiscal performance of 2022-23 shows that if there is pressure, the state will put in effort to mobilise additional resources. On the other hand, there is immense scope for saving resources by restructuring expenditure. Statutory pensions are increasingly becoming unsustainable. In 2021-22, Kerala spent 23.06% of its total revenue on pensions. The same for 17 major states is just 12.15%. My study has shown that if all statutory pensioners are brought under National Pension Scheme (NPS), the pension burden can be brought down by 50%. The savings can be used to raise the welfare pension from the present Rs 1,600 to Rs 4,544 per month. This amount will immediately reach the local market and revive economic activities at the local level. The shops lying closed now will open and this will in turn rejuvenate the goods transport sector. This is sufficient to unleash a virtuous cycle of economic growth and revenue increase. The state will come out of recession and overcome fiscal crisis in one shot.
Is it a workable proposition? Service organisations are demanding reintroduction of statutory pension for employees under contributory pension scheme?
I don’t think any government in Kerala can think of reverting to statutory pensions. LDF promised it in 2016 but even after seven years in power, it could not fulfil the promise. The government is not even able to pay DA arrears and pension arrears to the tune of Rs 20,000 crore. It will be suicidal to revert to the old pension scheme.