The Hindu Business Line : Kerala's fiscal crisis

Whichever way one looks at it, Kerala's fiscal crisis is palpably acute and it will take more than a clever Finance Minister to steer the State through the coming storm.

Last week Kerala Congress leader and former Finance Minister K.M. Mani had some strong words of criticism for T.M. Thomas Isaac, the State's present Finance Minister. He told reporters in New Delhi that Dr Isaac should quit, rather than continue as the State's Finance Minister in the wake of his recent statement that the State's coffers were empty and its overdraft had crossed Rs1,000 crore.

Characterising the situation as "explosive," the former Finance Minister said Dr Isaac's statement would be a "dampener" on Kerala's Onam celebrations as there was the distinct possibility of the State having to close its treasury.

Kerala's overdraft today stood at nearly three times its permissible limit of Rs 360 crore and the estimated revenue deficit for this fiscal was Rs1,853 crore, more than that in the last fiscal year, Mr Mani added.

IN DIRE STRAITS

Clearly, Kerala is faced with a fiscal crisis of gigantic proportions. Unprecedented it may not be - the previous United Democratic Front Government was always on the edge of a financial abyss.

The State Government is required to maintain a minimum cash balance of Rs 166 crore with the Reserve Bank of India. It resorts to overdraft whenever there is a shortfall from the agreed minimum cash balance in its account with the RBI.

According to the estimates of the Accountant General (Accounts and Entitlements) for the year 2002-'03, during 2002-'03, the State Government had to take overdraft from the RBI on 196 days and could maintain its minimum balance with the RBI only on 167 days. Today's situation is equally bad, if not worse.

According to Dr Isaac, the current financial position of Kerala is so grim that there is not enough funds to implement even one-fourth of the annual Plan for 2006-07.

PRESSING NEEDS

Some of the indicators of the State's fiscal crisis are staggering: The wage revision for government employees calls for additional funds to the tune of Rs 1,500 crore. Another Rs 190 crore is needed to pay pension arrears, and Rs 150 crore to provide rice at subsidised price for families below the poverty line.

The Minister claims that there are only three options before the "debt-stressed State": (1) a drastic cut in the Plan size; (2) ask the Centre to allow the State to go in for additional borrowings; and (3) spruce up tax collection in the State, which rakes in only one-third of the potential.

Since there seems to be little scope for across-the-board reduction in expenditure in the State, the only option before the State Government is to stress the revenue side.

That is not going to be an easy task. And Kerala cannot look to the Centre for much help in solving its fiscal crisis, as successive awards of the Finance Commission have shown.

Despite leading the rest of the country in terms of social and development indicators, Kerala has been at the receiving end of the award of the Twelfth Finance Commission (TFC) that determines the share of Central revenues to be transferred to the State.

`RAW DEAL'

The TFC award has been thoroughly analysed by K.K. George, K.K. Krishnakumar and V.K. Praveen of the Centre for Socio-economic and Environmental Studies (CSES).

They found that in the current year and the next four years covered by the TFC award, Kerela would be receiving Rs 6,088 crore less than what it would have got under the award of the Tenth Finance Commission.

The annual loss to the State will amount to Rs 1,218 crore, which will be Rs 240 crore more than the State's own total non-tax revenue.

According to the CSES study, Kerala's annual loss on account of the TFC award will be six times more than the additional Central assistance of Rs 200 crore reportedly committed by the Planning Commission to implement the development agenda suggested by President A.P.J. Abdul Kalam during his much-publicised visit to Kerala.

Whichever way one looks at it, Kerala's fiscal crisis is palpably acute and it will take more than a clever Finance Minister to steer the State through the coming storm.

The writer can be contacted at kgkumar@gmail.com