It is no exaggeration that Kerala is going through one of its most severe financial crises. The state is feeding hand to mouth. Last week, the LDF government wrote to PM Narendra Modi seeking his attention to the state’s financial needs and wanted the Central government to reinstate the borrowing ceiling to the 2017 level. The bone of contention between the Centre and Kerala is the borrowing by state public sector undertakings and special purpose vehicles (SPV). The Centre argues that borrowing by state PSUs, SPVs, and other equivalent institutions are serviced out of the state budgets. Hence, they should be considered as borrowing by respective state governments. The state is undertaking massive infrastructure projects through the Kerala Infrastructure Investment Fund Board (KIIFB), which has already borrowed Rs 70,000 crore. Bringing this under the state’s borrowing cap would leave little room to raise funds for day-to-day expenses. Kerala argues KIIFB is like the National Highway Authority of India, which borrows to invest in infrastructure.
To the state’s defence, the delay in getting GST compensation and the reduction in central assistance schemes after the 14th Finance Commission Award have accentuated the financial pain. Be that as it may, Kerala can’t escape the blame for the precarious financial situation it finds itself in. For one, Kerala’s high growth rate of Gross State Domestic Product is not accompanied by commensurate growth in revenue realisation. A key segment that has been untouched is land revenue potential, given that Kerala is a land-scarce state. While for most states, the land revenues account for about a third of the total revenue, the figure is just about 13–15% for Kerala. A look at Kerala’s tax revenue shows its pathetic performance over the years.
What’s the way out? Kerala’s revenue structure, at present, places a disproportionately high burden on the poor and the marginalised, and the proceeds are used to feed the government and government-aided sector employees. There is also rampant GST evasion. It needs to plug the holes. The state must tap the non-tax revenue potential from its highly developed health and education services. Also, government lands rented out at paltry sums to PSUs can earn better. The second Pinarayi Vijayan government’s second budget is slated for February 3. It remains to be seen if it contains some bold steps to boost revenues or if it continues to soft-pedal the much-needed reforms.