Kerala has been experiencing an acute fiscal crisis, somewhat similar to the worst crisis experienced in the state's history during the period 1999-2000. The crisis has many dimensions: lack of the state's own resources, persistent use of borrowed funds for meeting the revenue deficit, excessive increase in salary, pension and other items of revenue expenditure, fiscal extravagance in spending, under estimation of debt due to off-budget borrowing, and a cut in annual borrowing limit by central government.
Poor fiscal management by successive state governments is the root cause of this crisis.
The current government blames harmful central policies such as reduction in revenue deficit grant to the tune of Rs 7000 crore this year, loss due to the stoppage of GST compensation of around Rs 12000 crore and an arbitrary reduction of Rs 3578 crore in borrowing in the name of off-budget borrowing (total of about 23,000 crore) for the present acute fiscal crisis.
Is this what is really driving it? And what needs to be done?
Nature and magnitude of the crisis
Based on the Comptroller and Auditor General of India's (CAG's) accounts at a glance for the month of March 2022 and the state finance audit report for 2020-21, this is how the fiscal situation of the state looks.
The total revenue receipts of the state comprising tax revenue, non-tax revenue and grants-in-aid contributions of the Centre was Rs 1,16,546 crore in 2021-22. Of this, Rs 42,982 crore is the share from union taxes and grants-in-aid from the Central Government. It accounts for 37 percent of the total revenue receipts.
Of the total revenue receipts, 79 percent is spent on three items viz. salary, pension and interest payments.
The total revenue deficit is Rs 26,582 crore and fiscal deficit is Rs 42,786 crore in 2021-22.
Huge increase in salary and pension
A disturbing development in revenue expenditure during 2020-21 is the huge increase in salary and pension due to the once-in five-years revision.
The salary expenditure shot up from Rs 28,763 crore in 2020-21 to Rs 45,585 crore in 2021-22 (a 58 percent increase).
Pension expenditure too increased in the same period from Rs 18,943 crore to Rs 26,898 crore (a 42 percent rise).
The net additional financial commitment created as a result was Rs 24,777 crore.
This irrational policy has pushed the state to a fiscal crisis trap from which it is not going to recover in the near future.
Persistent fiscal crisis since 2016-17
The latest CAG report on State Finances Audit Report for the financial year 2020-21 also gives a dismal picture about the state's finances for the previous five years -- 2016-17 to 2020-21.
Though the revenue deficit target fixed as per the Kerala Fiscal Responsibility Act (KFR Act) is zero, the state was not able to achieve it for the above five years. In the case of fiscal deficit (as percentage of GSDP), the state was not able to achieve the target set by KFR Act for four years. When it came to debt, the state was not able to achieve the fiscal target set by KFR Act for all the above five years.
These facts indicate that the state has been experiencing a persistent fiscal crisis since 2016-17.
The way out
1) Fiscal crisis is a very complex economic, political and social problem and prescribing solutions is not an easy task.
For preparing policy suggestions, we have to review the recommendations already put forward by Kerala Public Expenditure Review Committee (KPERC), CAG and State Finance Commission (SFC). The KPERC and CAG's recommendations mainly pertain to state finances and the SFC's recommendations with local governments.
There is a need to review the recommendations made for the last 10 years and identify those relevant to the present context.
2) Follow the federal fiscal framework that existed in India and the roles it assigned to various institutions viz. Central and State Finance Commissions, Reserve Bank of India (RBI), CAG, GST council, Central and State governments etc. It is desirable to resolve the conflicts between state and central governments within the above framework.
3) The pre-condition for improving the fiscal situation is to achieve zero-revenue deficit. All the fiscal measures in the revenue and expenditure side should aim to achieve this objective.
4) The fiscal deficit or borrowing should be carried out only for capital investment and other items of capital expenditure. The borrowing should not be used to meet routine revenue expenditure.
5) Off-budget borrowings should be restricted to create public, capital and infrastructure assets which generate a return. The repayment obligations should be met from the returns on the investment. It should be implemented by an agency outside the government.
6) Priority should be given to improve the efficiency of collection of individual taxes made by the state government. This include measures to check evasion of taxes, reduce leakage of revenue, bring more tax payers in the tax net, monitor the periodic collection of taxes, introduce prompt collection of arrears, bring more tax payers into online mode, impose strict punishment of corrupt officials etc.
7) The local governments such as grampanchayats, municipalities and municipal corporations are collecting taxes and non-tax revenue. Studies by SFC show that the taxes are not revised periodically and the collection of tax is very poor. There is considerable scope for increasing the tax and non-tax revenue of local governments.
8) The basic cause the fiscal crisis is the mounting expenditure on five items, viz. salaries to government staff, teaching grants given to private educational institutions, pensions given to retired staff, interest payments and administrative expenses.
Implement the following measures to curtail these expenditures:
(a) Revise the salaries and pensions once in ten years instead of the current practice of revising it every five years.
(b) To reduce the expenditures on staff and to improve the quality of administration, introduce e-governance in all Departments.
(c) The payment of salaries, pensions, social welfare pensions etc. shall be done through banks.
(d) Some of the subsidiary activities like watch and ward, cleaning, gardening, transport of officials, delivery of mails in government offices, traffic control in roads etc can be outsourced or given on contract basis.
(e) The practice of starting new educational institutions and courses in private aided sector should be discontinued. The existing private aided educational institutions may be allowed to start new courses only in the unaided stream.
9) Fiscal extravagance should be stopped.
An MLA a few years ago claimed an amount of Rs 1.9 crore as medical expenses citing the norm of unlimited expenditure for medical expenses. District-level officers, meanwhile, are using luxury Toyota Innova car as official vehicles.
Such wasteful and reckless expenditures are common in government and public sector institutions. This should be stopped.
(BA Prakash was former Chairman of Kerala Public Expenditure Committee and State Finance Commission (Fifth). This is part of the web-only series of columns on newindianexpress.com.)