KOCHI: Even as the Left front government in Kerala faces increased scrutiny of its monetary management amid the current financial challenges, recent data indicates the state improved its performance over the last few years on key metrics linked to growth and fiscal responsibility.
The RBI’s ‘State Finances: A Study of Budgets of 2023-24’ report highlights that the contribution of state’s own tax revenue (SOTR) to Kerala’s overall tax revenue increased to 78.7% for the post-Covid period of 2021-23. By comparison, the average for all states was 65.4%.
According to the report, SOTR accounted for 74.5% of Kerala’s total tax revenue during the pre-GST period of 2015-17. In the post-GST and pre-Covid period of 2018-20, the share of SOTR stood at 74.3%. Meanwhile, Kerala’s state’s own non-tax revenue (SONTR) came in at 8.4% of total revenue for 2022-23, down from 10.8% in the 2009-20 period.
Additionally, data compiled by PRS Legislative Research indicates that in Kerala, own tax as a percentage of gross state domestic product (GSDP) is expected to clock in at 7.2% for 2023-24, reflecting the state’s potential to mobilise revenue from economic activities. A higher tax-to-GSDP ratio signifies a better ability to generate taxes. The national average is seen at 7%.
Fitch Ratings in its August 2023 outlook on Kerala said it expects sustained economic growth to support the state’s steady performance to the fiscal year ending March 2027 (FY27), although broad expenditure responsibilities and large infrastructure investment will lead to ongoing fiscal deficits and a steady rise in borrowings.
It added that the state’s economic expansion should adequately offset the increased debt burden, resulting in steady debt ratios. Critics have been emphasising the growing outstanding liabilities of the state government, which now stand at Rs 4,29,270.6 crore (2024 BE), a significant increase from Rs 1,91,622.9 crore in 2017.
Dr R Ramakumar, a professor at Mumbai’s Tata Institute of Social Sciences and part-time member of the Kerala Planning Board, emphasised the importance of not solely assessing liabilities in absolute numbers but considering them in relation to the ratio of total liabilities to the state’s GSDP.
“Kerala excelled in providing exemplary health services and distributing free rations to the people by expanding its expenditure. The state also implemented a substantial financial package to alleviate the impact of the deadly coronavirus and counter its economic fallout. Kerala stood out as the only state to increase spending during the crisis,” he said.
He expressed optimism that the liability ratio would gradually decrease as economic activity picks up, estimating a decline to 34% by 2025-26 from 36.9% in FY24 (BE).
On the flip side, Paras Jasrai, senior analyst at India Ratings and Research, says Kerala’s economy has been showing signs of moderation in growth for quite some time and that appears to be the case in FY24 as well. At a glance, the state’s finances do not portray an encouraging picture of fiscal health, he added.
“The state’s own tax revenues increased by just 4.8% year-on-year during April-November 2023 (8MFY24) which is more than half of the growth witnessed in other states. Since own tax revenues are a function of economic activity, muted own tax revenues indicate economic growth is subdued. The expenditure quality of the state as gauged by the capital outlay to revenue expenditure (CORE) ratio indicates a modest improvement. CORE improved to 9% in 8MFY24 from 8.7% a year earlier. However, it remains much lower than in other states where CORE stands at about 17% in 8MFY24,”he said.
Kerala’s debt to GSDP is expected to remain at elevated levels in the medium term until and unless there are structural changes to the economy, Jasrai stressed.