KOCHI: Ahead of the state budget on Friday, Jose Sebastian, economist and former faculty of Thiruvananthapuram-based think tank Gulati Institute of Finance and Taxation (GIFT), says Finance Minister K N Balagopal has little room to manoeuvre and there are no quick fixes.
Edited excerpts:
What are your observations on Kerala’s finances in light of recent RBI report?
The state’s finances are in dire straits. The total debt stock at Rs 3.9 lakh is quite alarming. The heavy dependence on borrowing has resulted in high-interest payments and debt servicing. A perusal of the RBI report on state finances shows that in 2021-22 — based on revised estimates — Kerala is top among 17 major states both in salary and pension as a percentage of total revenue.
While the average of the 17 states in salary as a percentage of total revenue is only 28.49%, in the case of Kerala it is 38.70%. The corresponding figures for pension are 12.22% and 22.87%, respectively.
There is an argument that Kerala’s debt position is not as alarming as is made out to be. Comparison is often made with the debt-to-GSDP ratio of countries like the US, the UK and Japan.
I don’t know how appropriate it is to compare the debt-to-GSDP ratio of Kerala, a tiny sub-national entity with that of economic powerhouses. The basic question is not the current level of debt per se but the sustainability of the debt. Kerala faces major problems on this front.
Already, the proportion of people above 60 years of age in the population is high. By 2030, it is quite likely that 20-23% of Kerala’s population is above 60. That means Kerala has lost a demographic dividend.
Second, economic growth in Kerala has been heavily dependent on remittances, especially from the Gulf. Those who migrated did not settle down there and their entire earnings were brought home. T
his is not the case with the current crop of migrants to the US, Canada, European countries, Australia and New Zealand. They are going to settle down there and this is sure to affect remittances. Then there is the threat of climate change. The state’s economy appears to be much more vulnerable than most Indian states to climate change.
How will curbs on borrowing affect the day-to-day running of the state apparatus?
Salary, pension and interest payments are considered committed items of expenditure. These three items of expenditure form 80.33% of total revenue. The average for 17 major states is only 55.21%. Till now, the government was relying on borrowing to meet other expenditures. With restrictions on borrowing, the quality and quantity of public services will seriously suffer.
Do you think the FM will embark on a serious resource-mobilisation drive in the budget?
The finance minister is fully justified if he embarks on a resource-mobilisation drive. This is because the present impasse is the result of a colossal failure of the state in public resource mobilisation. During the first ten years of Kerala’s formation, i.e., 1957-58 to 1966-67, Kerala had a 4.45% share in its own resources mobilised by all states put together.
This has fallen to 3.87% as per the revised estimates for 2021-22. In 1972-73, Kerala was eighth among the major states in per capita consumer expenditure. Kerala climbed to the first position in 1999-2000 and continues to occupy the position.
What is your prescription for Kerala’s fiscal maladies?
Resource mobilisation is not independent of public expenditure. In my view, the main impediment before Kerala in any aggressive resource-mobilisation drive is the current public expenditure. As I have pointed out, 61.57% of total revenue flows just to 5% of the population. Such a skewed distribution of public resources is self-defeating.
Does this seem to be an unthinkable proposition when service organisations are pressurising the government to withdraw the contributory pension system?
Yes, there are no quick fixes for Kerala’s fiscal woes. The government has to mobilise tremendous political will.