Leading development economist Prof K P Kannan is known for his distinctive views on state economy and his conviction to stand up for social causes. Vocal in questioning the state’s financial mismanagement, he’s never shied away from pointing fingers at back-to-back state governments incurring revenue deficits. Former director of the Centre for Development Studies, he wears many hats with élan. Speaking to TNIE, Kannan stresses on an urgent need to tighten tax collection so as to tide over financial crisis, gives his assessment of Finance Minister K N Balagopal, and touches on the need to raise retirement age to at least 60.
Excerpts:
The state budget is scheduled for February 5. What’s the current state of the Kerala economy, especially in the wake of state government’s severe criticism of the Centre?
As both an economy and society, Kerala is doing remarkably well compared to other states, except Haryana. One of the main reasons is the consistent annual flow of remittances, which is equal to or slightly more than the state government’s total revenue income. The government’s revenue income worked out to between Rs 1 lakh crore and Rs 1.29 lakh crore between 2021 and 2023. It would have been much higher had the government maintained a high level of alertness and efficiency in collecting its own revenue. Given the government’s revenue expenditure is higher than revenue income by 15 to 25%, it is compelled to resort to borrowing to cover the deficit year after year. This persistent gap is one manifestation of the crisis in its public finance management. The Kerala economy has maintained a decent annual growth in real terms of around 6% (or a nominal rate of 12 to 13%) per annum, akin to the national average, which is one of the best globally.
Do you mean to say there is no economic crisis in Kerala but that the state government’s policies are wrong?
More than policies, it is about working efficiency. GST is a national regime, not state policy. It is about translating policy into actual collection. I won’t say there is no problem because of the Centre’s policies. Because of the change in criteria for horizontal distribution of the divisible pool, even the shares of Tamil Nadu and other south Indian states, along with Maharashtra and Gujarat, have come down. We get a 1.98% share of the total 41% earmarked for states. If you want to get your money in time, you must complete formalities in time like submitting utilisation certificates and fulfilling procedures. But our financial discipline is not that great. If Kerala and the Centre have a public finance problem, and if the problem is not restricted to Kerala alone, then one should try to elicit the cooperation of other states, and put up a joint fight. Transferring your inefficiency to the Centre or accusing the Centre is a politically convenient shortcut. You got to put your house in order and then argue with the Centre for a more state-friendly redistribution of revenue collected by it.
Is Kerala playing the victim card?
We have always done it. Why don’t you set up an independent expert commission and then list and assess the various discriminations directed at Kerala?
Has the transition to GST affected states’ tax autonomy?
GST has reduced the fiscal autonomy of states. The Government of India has not come up with an ecosystem for its proper and transparent functioning. They are more concerned about giving concessions and loopholes to traders. The Union government has however benefitted.
The Left had initially opposed GST...
When GST was introduced, most states were worried because tax is divided equally between the Centre and the state. Earlier, it was meant only for the state. The Centre was however in a hurry, partly because it is part of new international liberal economics. What with the loss of political and financial manoeuvrability and the potential loss of income, compensation was announced. Thus, in addition to the actual gap, an annual 14% increase was given as compensation. Unfortunately, although the Left was in power, the then finance minister Dr Thomas Isaac welcomed it, saying we would get Rs 3,000-4,000 crore more.
Though the Left was not keen on GST, Isaac supported it...
He has now shifted his position by accusing the Centre. I don’t understand such shifting economics.
Isaac had said Kerala would benefit because it is a consumer state...
I don’t understand that theory because most of our goods come from other states. They are the ones who will benefit because in integrated tax, a part of it goes to the originating state, and only half of the remaining part will be received by the consumer state. Roughly put, around 80% of our taxable consumption goods come through Tamil Nadu traders.
Was GST bad for Kerala?
GST is not good for most states. It has reduced states’ actual collection. Even if this reduction is not substantial, it is not negligible either — around 15% for most states. But most states live within their means. For the past 30 years or more, Kerala has incurred a revenue deficit year after year. The former FM says we borrow to grow. Earlier, until 1982-83, pension and interest together came to only around 10 to 12% of our total revenue. Now, it is 40-42%. In 2000, it had gone up to 48 or 50%. Thomas Isaac’s theory of growing through borrowing has become a growing burden through borrowing. Now 20% of our revenue has to be earmarked to pay interest. About 20-22% has to be spent on pension. That means the current finance minister, K N Balagopal, gets close to Rs 60 for every Rs 100 of revenue income. Of this, 2-3% will go to KIIFB. He now has Rs 58 for every Rs 100 he gets to spend on salary and all other programmes. It is clearly inadequate and we keep borrowing.
What could be the motive behind the economics of saying we can deal with the crisis through borrowing?
If you are a sovereign government, borrowing is not that big a problem. Isaac refers to the Domar Model here. It says if a government wants to borrow for investment, borrow, invest, produce goods and services, generate more income. The growth rate achieved via the borrowed money should be greater than the interest to be paid.
Are committed and revenue expenditures not a legacy issue? Why blame Isaac alone?
I never said Isaac is to be blamed for it. It is a structural legacy created by successive governments. Serious revenue deficits started in the 90s. To overcome a legacy problem, tighten collection efficiency. Our golden period was 1976- 82. For every Rs 100, Rs 11.5 was collected as tax. Between 1976 and 1992, it was Rs 11.15. But in the past 10 years, it became, on an average, Rs 8.2 and in the last five years Rs 7.9.
Any estimate on the tax we are losing?
There is no estimate of the exact loss of revenue due to evasion. By comparing past performance, I find it to be between 3 to 4% of GSDP. At the current level of state income, it works out to a little more than Rs 30,000 to 40,000 crore. If you add the remittance income to the GSDP, the amount will definitely be more than Rs 40,000 crore. It is high time Kerala came up with a white paper on public finance management for the past 30 years with more details.
Kerala’s total outstanding liability is a very high 38-39% of GSDP. Is it worrying?
It’s worrying because of payment of pensions and interest. As far as pensions are concerned, the government should seriously consider fixing a ceiling until the revenue deficit in Kerala is eliminated. I’ve proposed a ceiling of Rs 50,000 considering the state’s current situation. But you can’t say no to interest payment. We need to bring it down consciously by reducing borrowing in proportion to the increase in own revenue to state income ratio.
Have you discussed this with the finance minister?
Yes. I had an opportunity to interact with the finance minister at a seminar recently. Balagopal was open to listening as well as responding creatively to our suggestions. He doesn’t pretend to know everything. He admitted we need to increase tax collection. He said, this year, Rs 25,000 crore more has been collected, compared to last year. The state’s own tax revenue is increasing, but it’s hardly an increase of one percentage-point. The own revenue to state income ratio needs to be increased to 11-12% within the next three years.
Is the production sector also going down?
That is a larger issue. In Tamil Nadu, the agriculture sector is growing by 4 to 5%. Kerala has only 1 to 1.5% growth. The past few years have witnessed a decline in the area cultivated. We failed in supporting agricultural production. Real estate has become a source of investment. As per the 2011 Census, we have 10 to 11 lakh housing units reported as not-occupied. We are encouraging investment from outside in non-productive activities. There are no incentives, let alone hand-holding, for productive activity. The general brand value of Kerala does not seem to be conducive to investment.
In Kerala, environmentalists keep objecting to projects...
I am a Leftist. Left doesn’t mean ‘don’t produce, only distribute’. But to distribute, you must have something to distribute. Real-world socialism in poor countries is to produce and be able to distribute. Indian capitalism doesn’t believe in distribution. You claim to have a more humane ideology. But you should also have the means to produce and distribute when you have power. Why did the Left collapse in West Bengal, after 33 years of continuous power? Such Leftism is merely rhetorical. After the floods, why are they not interested in environmentally regenerative activities to strengthen our weakened natural capital base? What happened to the ‘Rebuild Kerala’ project? Thousands of kilometres of river embankment have collapsed, as highlighted by UNDP, which emphasises the need for restoration. The kind of construction that still goes on is deeply carbon-intensive, for example, the expensive buildings by KIIFB.
Do you believe KIIFB will eventually become a burden for the government?
It has already become one, with the interest burden on the rise. Isaac and others argue that off-budget borrowings should not be considered a part of the government debt, a stance not supported by theoretical economists. An analogy can be drawn to a father guaranteeing his son’s loan — if the son cannot repay it, the bank will turn to the father. If the government is the ultimate payer, it should be included in public debt. The Kerala government has guaranteed Rs 44,000 crore till date. Please clarify how much the government is liable to pay in case of default?
Is KIIFB an extra-constitutional body?
Yes. It is an extra arm to which you provide funds, without the right to question how it is spent. The legislative assembly has no role in project selection and sanction.
If the borrowings of KIIFB come under public debt, do you think it is advisable to make it a separate entity?
The government’s primary responsibility is to construct schools, roads and bridges – essential components of social overhead projects. KIIFB should focus solely on building productive assets. As a corporate entity, if they want to maintain credibility, they should invest in projects that generate returns and are self-liquidating.
The government claims one lakh MSMEs have come up in the state, with startups too emerging...
Kerala is changing, but not to the extent necessary for a transformative impact at the macro level. Certain sectors are performing well, such as food processing, where demand is assured. We have also shown progress in select areas like dental care products. Another success story is blood bags. But they don’t collectively result in an impressive growth in the manufacturing sector, comparable to states like Tamil Nadu.
Critics point to the huge committed expenditure and the need to control it. Where do you feel a scope for reduction exists?
I have never advocated reduction in expenditure. The only solution is tightening tax collection. Perhaps we could increase efficiency and cut down on extravagance. We can easily collect an additional Rs 30,000 to 40,000 crore, by simply maintaining tax collection efficiency. Just increasing tax collection by one percentage point every year could yield Rs 10,000 to 11,000 crore, as our state income has gone up to Rs 11 lakh crore or more.
Is it true that employees in Kerala are paid more compared to other states?
Not sure, but I believe perks are more in Kerala. For instance, government employees can encash unused leave every year, a benefit not available in other states or even the Central government employees. The annual burden for the state is around Rs 1,000 crore, and the Sunil Mani Committee has recommended discontinuing this practice immediately.
Your take on retirement age...
Longevity has increased, and the retirement age in Kerala is 56. Youth organisations in the state are a deceived lot, with youths perpetually waiting for jobs. Opportunities remain scarce. Annually, only 23,000-24,000 employees retire, representing the net employment potential. Most new job creations are in local bodies on a temporary basis. State PSUs are not producing jobs, and net employment is decreasing. Retirement age should be raised by another four years, making it at least 60, like in a majority of the states.
Do you think the youth are over-dependent on government jobs?
My estimate is that at least 10 lakh people with a graduate degree actively seek work or sit at home, including around eight lakh women. Our politics are driven by slogans, and there is no serious study. Senior politicians should inform youth leaders of the reality. Many people, including youth organisations, are unaware that recruitments after 2013 have a retirement age of 60. The average period of employment in Kerala is only 24 years, given that the average age of entry is 34.
What about cutting expenditure?
Tightening the belt will affect ordinary people. If you cut expenditure, about 50% of the population will be affected. However, cutting unnecessary expenditure – bringing in a pension ceiling, modifying leave surrender and increasing retirement age — could help generate close to Rs 10,000 crore. Increasing retirement age is long overdue. A doctor or an engineer retires at 56. He’ll then be absorbed by the private sector. He now gets double income. Won’t this create more inequality? Taking such measures is what I call Leftism.
What happened to the mainstream Left in Kerala?
They got ossified over the years. Look at their approach towards the green agenda. Is it anti-communist? Are there any serious attempts towards producing green energy? There are many vested interests involved.
Do you think there’s a nexus between a section within the Left and crony capitalists?
Yes, and it’s deep-rooted. I’m a follower of Dr K N Raj. I believe academics should not take sides and must be objective. It’s very important to have a more open discussion on what it is to be progressive and distributive. Most factors that are now in place only lead to increasing inequality.
Do you believe the much-discussed ‘Kerala model’ doesn’t hold water now?
The progress that we made in human development is basically because in all such human development indicators, the benefits are not just social but also individual. Now there’s a schism that needs to be addressed by the political leadership. There are many collective needs for which money should come from a collective kit. I think we failed miserably in the economic management of this area. The Kerala model is a half-built house. You’ve done half of the building, but don’t care to complete the other half. Kerala has all the resources to become a highly advanced state but its public performance is not up to the mark.
So, is it time to revisit the very concept of Kerala model?
Yes. It needs to be revisited to meet the economic challenges. We’ve already reached a high level of human development. That should’ve produced much more benefit from an economic and self-reliance standpoint. If we didn’t have Gulf remittance, we would’ve gone the Sri Lanka way. The Kerala model is still a work in progress. We need imaginative social engineering to fix the state’s issues.
The CDS study in 1975 doesn’t mention the term Kerala model. The CPM is now trying to appropriate the Kerala model...
Nobody ever mentioned that term. But that’s how word went around as it was a unique way to capture the progress made by a poor agrarian society. In fact, foreigners called it the Kerala model. EMS never agreed with the term, even openly criticising its usage.
You have been termed a crony of the Centre...
Yes. Even Thomas Isaac has said the same. I’ve tried to revisit the Kerala model through my recent book. Only blind followers of the party have opposed its contents.
There are many who advocate reducing spending on social pensions...
It’s such a meagre amount. Why take up cudgels against that? There’s a whole lot of other needless expenditure. Even panchayat presidents want an Innova car. When you talk about socialism and Leftism, shouldn’t you be looking at such aspects first? C Achutha Menon lived on his freedom fighter’s pension after stepping down as chief minister. EMS too was a Gandhian Communist. There’s a symbolic value in how you conduct yourself in politics as it motivates youngsters and society at large.
TNIE team: Anil S, Rajesh Ravi, K S Sreejith, M S Vidyanandan, Vincent Pulickal (photos), Pranav V P (video)