The Hindu Business Line : Kerala's fiscal deficit correction on course

The fiscal deficit correction envisaged under the Kerala Fiscal Responsibility Act, 2003, seems well on course going by the experience of the first two years since the Act came into effect.

This, however, is subject to the amendment to the Act in accordance with the stipulations of the Twelfth Finance Commission (TFC).

Kerala Act

The original Kerala Act targets reduction of fiscal deficit to two per cent of the gross state domestic product (GSDP) by 2006-07, while TFC is more lenient with a target of three per cent by 2008-09.

According to the first report of the Public Expenditure Review Committee, constituted under the Kerala Act, starting from a fiscal deficit of 5.53 per cent GSDP in 2002-03, the target of three per cent by 2008-09 calls for a reduction in the deficit by 0.42 percentage points per year.

Fiscal Deficit

The fiscal deficit actually rose by 0.61 per cent of GSDP in 2003-04, but came down by 1.71 per cent in 2004-05, thus more than compensating for the rise in the previous year. In aggregate, the correction in the first two years was in conformity with the requirement under the Act, assuming amendment.

Correspondingly, the ratio of debt to GSDP rose slower after the Act than in the preceding three years. This was, however, possible because of the higher rate of nominal GSDP growth of 11.4 per cent since 2003-04. Despite this, the debt-GSDP ratio stood at 41.7 per cent at the close of 2004-05, which was higher than the approximately 32 per cent in Andhra Pradesh and 28 per cent in Karnataka and Tamil Nadu.

GSDP Growth

With an average rate of interest of 9.5 per cent, the annual interest on the debt worked out to nearly four per cent of GSDP. This huge drain on the public exchequer calls for stabilising and eventually reducing the public debt as a percentage of GSDP, quite independently of the Fiscal Responsibility Act, observes the review committee.

It underlines the need for sustaining the higher GSDP growth of 2003-05 in the future by protecting the productive capital outlays in the budget and restraining unproductive expenditures such as pensions. For, the physical infrastructure in the State is grossly under-provided in some sectors such as drainage and waste water disposal, says the report.

Committee Report

Similarly, there is an immediate need for one-time settlement of the outstanding dues of the public sector undertakings in the State. For instance, the Kerala Water Authority (KWA) is given non-plan grants to cover its operating losses on account of non-payment of water bills by panchayats.

Likewise, KWA is in default of payments of dues to the Kerala State Electricity Board (KSEB). However, with effect from 2005-06, 50 per cent of the dues to KWA is payable directly to KSEB and this is a step in the right direction, says the committee report.