Can Kerala Avoid The Impending Debt Trap?

Published: 25th March 2016 04:00 AM  |   Last Updated: 25th March 2016 09:49 AM   |  A+A-

At the end of March 2015, the public debt of the government of Kerala stood at `1,35,440 crore. On a per capita basis, the burden would be well over `40,672. In no other state, except perhaps in Himachal Pradesh, is the per capita debt as high as in Kerala. According to the latest indications, the total debt would exceed `1,54,057 crore at the end of March 2016. Furthermore, 60 per cent of the debt would have to be repaid within five years. This raises a major question. How can so much money be raised? Apparently, indications that the State could be getting into a debt trap are very strong.

A mild dose of deficit is being advocated as a sound policy option since the Keynesian revolution. However, deficits which lead to the growth of debt beyond a limit can be dangerous. Though the exact size of the deficit cannot be demarcated, it is generally agreed that revenue receipts must be sufficient to meet normal revenue expenditure like salary, pension and interest and that borrowed funds should be utilised for creating durable assets. Even then, one noted economist Feldstein maintains that “sustained budget deficits in peacetime are harmful”. Opinion is divided on the efficacy of budget deficits.

The growing deficits of Kerala, which have become a recurring phenomenon during recent years, may eventually lead the State into a debt trap, if continued without any restraint. Significantly, a fiscal deficit of 3 per cent and a revenue deficit of 0 per cent of GDP(Gross Domestic Product) have been stipulated by the Fourteenth Finance Commission as a safe margin. The actual fiscal deficit was well over 3.59 per cent and revenue deficit 2.65 per cent at the end of the financial year 2014-15.

It is believed that the GDP growth at a rate higher than that of the debt rate may not create any problem. The Chief Minister of Kerala, who also holds the finance portfolio, stated during the budget speech that the growth of the economy in 2014-15 was as much as 12.31 per cent, far higher than the all-India rate. Needless to say, the government of Kerala seems to be under the impression that the growing volume of debt may not pose a threat on account of the buoyancy of the economy. Nevertheless, for various reasons, the dependence on GDP growth as a safety anchor for resorting to deficits may not be a reassuring proposal in so far as Kerala is concerned. As a starting point, doubts regarding the credibility of GDP estimates are rampant in India. Furthermore, the frequent revisions of GDP with new methodology/base create confusion in the minds of the people, as wide variations appear between the estimates prepared on different occasions with new methodology/base.

There was thus an abnormal increase of 18 per cent in the GDP estimates of Kerala in 1994-95. Again, when the revision was made in 2004-05, the increase was as high as 11 per cent compared with the estimates of the previous base. A closer examination of the economy of Kerala reveals that it is not as robust as it is supposed to be. Agriculture and industry, the two productive sectors of the economy, are exhibiting decelerating tendencies.

Naturally, the growth of the economy relies primarily on the better performance of the service sector. Service sector per se does not produce any tangible commodity, but renders only intangible services.  However, service products in turn have to be utilised as and when they are produced or supplied, if at all they are to render any value or output. Prima facie, utilisation forms a consumer activity and service sector inevitably becomes a mere consumer service. Since practically a major chunk of the output is thus generated through consumer services, Kerala has become a consumer state.

It is reported, for instance, that Keralites utilise nearly 15 per cent of the total consumer durables of the country while Kerala accounts for only 2.76 per cent of the Indian population. Utilisation of services calls for purchasing power which luckily comes from the annual remittances sent by Kerala’s sons and daughters who work in foreign lands. The remittances thus received are used by and large for meeting the consumption needs. Apparently, the income generated in Kerala amounts to expenditure for the utilisation of services by the remittances and not by production. The income thus generated by utilising the services for consumption does not lead to further growth of the economy, as most of the goods used for consumption are imported from other states. Similarly, construction, supposed to be a productive activity accounting for more than 15 per cent of the GDP, generates only a notional income in the form of rent from the buildings.

The goods and services needed for the construction activities per se including labour are imported from outside resulting in the leakage of huge amounts of   money from the state. For instance, nearly `17,500 crore is being leaked out of Kerala by way of remuneration to the migrant workers from other states. In other words, none of the activities pave the way for further growth of the economy on a multiplier basis.

Ipso facto, the growth of the economy which amounts to an artificial one arising from the expenditure on consumer services met from remittances is endowed with very little leverage to sustain it.

At the same time, the remittances which create conditions of prosperity in the state may dry up at any time. When such negative signals persist, to regard GDP as a safe anchor for keeping the state finances from slipping into a debt trap, cannot hold good in so far as Kerala is concerned.

The piquant situation has emerged because of the lukewarm attitude of the government in adhering to the safety limits prescribed by the Finance Commission and other expert bodies. The state government has even failed to honour the provisions of the Act enacted by them in 2011 for reducing the deficit.

The attitude of the state government seems to be to spend more than the revenue receipts by creating new institutions with additional cadre posts like schools, colleges, universities, panchayats, municipalities etc., on the lines of Parkinson’s law without bothering about the need for them or the financial commitment arising from such creations. What is urgently needed to retrieve the situation is to reduce the expenditure and augment the revenue by adopting appropriate steps on the lines of the time-tested balanced budget.

 The author is a former member of Kerala Public Expenditure Review Committee. Email:

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