Kerala Finance Minister K N Balagopal recently informed the Legislative Assembly that the state is reeling under an unprecedented fiscal crisis and attributed the "distorted" fiscal policies of the Union Government, the havoc caused by Covid-19 and recurring natural disasters as reasons for it.
He chose to add that the reasons contributing to the crisis are beyond the control of the state. However, the Minister failed to mention anything about the role of fiscal policies and fiscal management of the state government on the crisis.
Kerala has been experiencing a perpetual and acute fiscal crisis and the crisis is multi-dimensional. The contributory factors include; the inability to increase the state's own resources, persistent use of borrowed funds for meeting revenue deficit, excessive increase in salary, pension and other items of revenue expenditure, fiscal extravagance in spending on many items, under-reporting of debt, off-budget borrowing for meeting revenue expenditure and so on. The unsound fiscal policies pursued and poor fiscal management by the successive governments in the state are the basic causes for the crisis.
The Comptroller and Auditor General of India’s (CAG) State Finances Audit Report of Kerala for 2020-21 presents a dismal picture about the state finances for the previous five years from 2016-17 to 2020-21.
The state was not able to achieve the revenue deficit, fiscal deficit, and debt Gross State Domestic Product (GSDP) targets stipulated as per Kerala Fiscal Responsibility Act (KFR Act) for the above five years. The only exception is the achievement of fiscal deficit for 2019-20.
The CAG has calculated the overall debt of Kerala including off-budget borrowing as Rs. 3,24,855 crore in 2020-21 (Debt GSDP ratio 39.87 per cent). This is an excessive and unsustainable level of public debt of the state by any fiscal norms.
The CAG’s preliminary accounts for the financial year 2021-22 also give an alarming fiscal situation of the state. Accordingly, the total revenue receipts of the state comprising tax revenue, non-tax revenue and grants-in-aid contributions of the Centre was Rs 1,16,546 crore in 2021-22. Of this, Rs 42,982 crore is the share of union taxes and grant-in-aid from the Central Government. It accounts for 37 per cent of the total revenue receipts. The total revenue deficit is Rs 26,582 crore. For meeting this revenue deficit and other items of expenditure, the state borrowed Rs 42,786 crore in 2021-22.
A disturbing development in revenue expenditure during 2021-22 is the huge increase in salary and pension due to its revision once in five years. The salary expenditure increased from Rs 28,763 crore in 2020-21 to 45,585 crore in 2021-22 (58 per cent) and pension expenditure increased from 18,943 crores to 26,898 crore (42 per cent). The net additional financial commitment created for the above two items was Rs 24,777 crore. This is a major factor which pushed the state to the present acute and unprecedented crisis.
It is a fact that natural disasters and the spread of Covid-19 had severely affected the state finances. Natural disasters such as the devastating floods and landslides during 2018 and 2019 have resulted in the unprecedented dislocation of people, destruction of houses, loss of property, damage of public infrastructure such as roads and bridges and loss of livelihood of lakhs of people.
The post-disaster needs assessment (PDNA) had estimated the total losses of the floods of 2018 was around Rs 26,720 crore and total recovery needs as Rs 31,000 crore. The state was forced to spend a lot of funds for the rehabilitation, relief, repair of damaged assets, compensation of damaged properties and reconstruction of infrastructural items.
The spread of Covid-19 in the state since March 2020 has also created a health and economic crisis. Even after two and a half years, the state’s economy has not returned to the pre-Covid level. The pandemic has resulted in a large fall in the state's own taxes, non-tax revenue and the state share of union taxes. The state was forced to spend a lot of funds on measures related to containing the spread of the pandemic, improving public medical facilities, treatment of Covid patients, testing, running quarantine centres, and community kitchens, purchase of medicines and equipment, distribution of food kits, vaccination etc.
Coming to the issue of "distorted" policies of the Union Government, major items under this head are a reduction of Rs 6716 crore in revenue deficit grant from the Centre compared to the previous year, a reduction in state borrowing limit by Rs. 24,639 crore and loss of at least Rs 9000 crore in the current year due to stoppage of compensations on goods and 3 service tax (GST). The revenue deficit grants are given as per the recommendations of the Union Finance Commission to states to tide over the revenue deficit and improve their fiscal situation. It is a grant and not an item of central resource to be transferred to the state. The 15th Union Finance Commission has recommended a revenue deficit grant of Rs 53,137 crore for four years between 2020-21 and 2023-24 to Kerala. The state government has received an amount of Rs 39,605 crore till July 2022. The receipt of this amount has considerably helped the state during the Covid-19 period.
ALSO READ | Kerala economy grows, still has woes
The borrowing limit of a state is fixed as per the KFR Act passed by the state and the CAG’s audit on the amount borrowed. In the case of borrowing, the CAG has found under-reporting and asked the state to treat certain items of out-of-budget borrowing as regular borrowing. But the state government is not agreeing to this view. As CAG is the constitutional authority in these matters, one hase no other option other than accepting the interpretation of CAG. One cannot consider the stoppage of payment of GST compensation to states after the introduction of GST for five years as a "distorted" policy of the Union Government. In fact, there is no evidence to support the view that the Centre's policies contributed to the crisis.
B A Prakash, was Professor of Economics, University of Kerala and Chairman, Fifth State Finance Commission, Kerala