The Hindu Business Line : `Limited taxation powers hit Kerala development model'

Limited powers of resource mobilisation available to a sub-national entity such as Kerala has prevented the State from managing funds required for sustaining its famed development model, which has long drawn comparisons with even sovereign nations.

For instance, a fall in the ratio of growth of own tax revenue and growth of State Domestic Product (SDP) has been discernible since the 1990s.

A testable hypothesis advanced is that though the Kerala economy has been growing, the fastest-growing sub-sector, i.e., the services sector, has been kept outside the taxing powers of the States.

In a paper titled, `Fiscal fragility: The Achilles Heel of Kerala's Development Experience', the economic researcher duo of Mr R. Mohan and Mr D. Shyjan say that the own tax-SDP ratio of Kerala has risen over the decades, but only at a progressively decreasing rate since the 1990s.

If this trend were to hold, it could lead to a fall in tax-SDP ratio in future. No wonder, the 12th Finance Commission report has fixed a high normative buoyancy rate of 1.30 for the State. A high normative buoyancy rate is fixed when there is a felt need for tax-SDP ratio to keep pace with per capita SDP.

As per the Constitution, States can tax the sale of commodities but not services, except a few ones such as electricity duty and entertainment tax. As a State within the Union, Kerala is thus barred from taxing the fastest growing sectors of its economy.

This particular pattern of growth itself has evolved out of cross-border and inter-State remittances and has resulted in the State having sectors and sub-sectors, which grow fast but outside of the State's tax net. For instance, telecommunications, banking and insurance and a wide range of services are included in `Other Services'.

Historically speaking, there has been a structural shift in the SDP with the share of the primary sector falling since the second half of the 1970s. It ceased to be the dominant sector since the early half of the 1980s. The share of the tertiary sector, in which sub-sector trade is the predominant one, has since started rising. The share of the secondary sector also has been rising, but not at rate comparable with the other two.

The shift gets reflected in the tax-SDP ratio, which shows a rise to begin with but flattens out subsequently. The authors attributed this flattening out mainly to the fact that the faster growing components of the service sector are kept outside the taxing powers of the State.

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