Finance Minister K N Balagopal’s long-winding budget speech came as a surprise, given his earlier performances. While it might be music to many people listening to a long list of projects and schemes, what I find disappointing is the overall decline in financial discipline and efficiency that gets further reinforced if one considers what he did not say.
For example, he was jubilant about the increase in the state’s own revenue (tax and non-tax), which works out to 9.8% since last year, and presented it as an achievement. That is not a measure of tax collection efficiency because one should also consider the tax base, i.e. the state’s income referred to as GSDP that grew by 11.3%. This resulted in a reduction of tax-to-state income ratio to 7.8% compared to last year’s 7.9%. That means, he collected Rs 7.8 for every Rs 100 of state income this year, while it was marginally higher last year. But this decline would appear as a bigger one if you compare the tax-to-state income ratio of 8.5% in 2022-23.
In fact, a longer period analysis would show that it was a steep decline from around 12% in the late 1970s to 9 to 9.5% till 2017-18 and between 8 to 9% since then. What this shows is a progressive decline in tax collection efficiency which is witnessing another low-level equilibrium of between 7 to 8%.
Had the finance minister been able to maintain his own previous record of Rs 8.5 of revenue collection for Rs 100 of income, he would have got an additional revenue of close to Rs 9,000 crores. But the real tax-to-state income ratio is quite lower than what is given in the budget papers because it does not include remittance income in the state income in accordance with the all-India practice.
Since this is a significant size in Kerala (equivalent to 17% of state domestic income in 2023-24), constituting people’s disposable income, the tax-to-state income ratio works out to a mere 6.7%.
Given Kerala’s first rank in per capita consumption expenditure and an attractive market for all kinds of fast-moving consumer goods, this low ratio is nothing less than a pitiful performance in tax collection efficiency. Another significant point I want to make is that the relatively low revenue deficit is an artifact because some expenditures have been postponed out of this year’s account.
This includes Rs 16,000 crore in payment due to contractors and establishments who have completed the works undertaken for the government, the three months due of social pension amounting to Rs 3,400 crore, and the pay revision arrears of Rs 15,000 crore.
If these arrears are added to this year’s expenditure, the revenue deficit would be 4.98% of the state income as opposed to 2.29%, as stated in the budget papers.
There are other payment obligations such as the payment to the anganwadis and the school midday meals that are not counted here for want of precise details.
If they are included, the revenue deficit will be well over 5% of the state income. Earlier, these payment obligations were met by additional borrowing and hence the higher revenue deficits. Since a cap on borrowing has come into effect, the only way to show a lower revenue deficit is by not meeting payment obligations. But then this is bound to show up next year unless tax collection efficiency increases.
Despite the ceiling imposed on overall debt-to-state income ratio, the government’s increasing reliance on debt just to finance its day-to-day expenditures has landed it in a situation where 22.4% of the total revenue must be earmarked for paying interest.
Add to this another 20.8% for payment of service pensions. In sum, Rs 43.2 from every Rs 100 of total revenue must be earmarked for payment of interests and pensions. That leaves close to only Rs 57 for all other items of expenditure. This leads to a fight for debt and more debt; but no commensurate enthusiasm seems to exist to increase revenue collection efficiency.