More warnings on Kerala’s debt trap
Kerala’s mounting public debt has been an engaging topic for planners and economists for the last few years. Last week, economists of the RBI flagged the lurking dangers if the state government does not initiate measures—both short- and medium-term—to address the elephant in the room. Citing the financial crisis in Sri Lanka, a team of economists led by deputy governor Michael Debabrata Patra named Kerala, Bihar, Punjab, Rajasthan and West Bengal as ‘highly stressed’ states.
Along with Rajasthan and West Bengal, Kerala is projected to surpass 15th finance commission targets for debt and fiscal deficit this fiscal. The Covid-hit tourism industry and a sharp decline in remittances from abroad are among the factors that led to the Sri Lankan crisis. Tourism and remittances are key contributors to Kerala’s economy too. Another disturbing trend the RBI noted is the declining tax and non-tax revenue. Kerala features on the list of 10 states that have recorded a decline in tax revenue. The state is also in the group of four that spend over 90% of the earnings on revenue expenditure and in the group of five that saw the steepest rise in subsidies in the last three years.
A recent decision of the government to withdraw monetary support to Kerala Social Security Pension Limited (KSSP) is a classic example of how shortsighted decisions can boomerang. The KSSP, formed in June 2018 as a government-owned company, raises funds through borrowings to pay Rs 1,600 each every month as social security pension to 52.27 lakh beneficiaries. But the means to repay these borrowings were not defined properly and with the government now withdrawing as a guarantor, the future of the firm and the pension scheme are hanging in the balance. The RBI team estimates that Kerala’s debt-to-GSDP ratio will be 38.2% in 2026–27. One way to tide over the crisis is to cut down all unwanted revenue expenditure. The other is to explore ways to generate more revenue, for which the state will have to think out of the box. Steps to stablilise debt and bring the debt-to-GSDP ratio below 30% should be the priority.