The Hindu Business Line : Budgeting for change?

Even as Kerala's Finance Minister Thomas Isaac seeks to increase revenue receipts through his proposals for this year's budget, he still has to pump out more incentives to achieve the goal of a robust economy as the catalyst for revenue growth.

Much like a surgeon emerging from the operation theatre after a long and gruelling procedure that could make or mar the patient, Dr T.M. Thomas Isaac, Finance Minister of Kerala, left the State Legislative Assembly last Friday content that he had set the State on a new path of recovery and growth with his budget proposals for 2007-08.

As the doctor - the Minister may not have a medical degree but he has earned a doctorate in philosophy for his research in economics - exudes confidence in his second budget since the Left Democratic Front (LDF) came to power, the jury is still out on whether that self-assurance will translate into sound and solid economic growth for Kerala.

The stage for this year's budget was clearly set out in the Economic Review 2006 brought out by the State Planning Board. Drawing parallels with the trajectory of the national economy, the Economic Review points to the near-similarity in Gross State Domestic Product (GSDP) growth rates - 8.2 per cent and 8 per cent for 2004-05 and 2005-06, in the case of Kerala, and 7.5 per cent and 8.4 per cent for the national economy.

KEY DIFFERENCES

However, the Economic Review points to two significant differences between the economies of Kerala and India. The first concerns the relative shares of the different sectors (primary, secondary and tertiary) in the gross output.

(According to the Economic Review, the tertiary sector accounted for 60.5 per cent of the GSDP, while the primary sector contributed just 15.7 per cent, with the secondary sector bringing in a contribution of 23.8 per cent.)

The second difference between the State and national economies is that within the secondary sector in the State, the construction, rather than the manufacturing sub-sector, predominates.

From these crucial differences, the Economic Review points to the structural highlights of the Kerala economy - the preponderance of small and traditional industries, and how the inflow of non-resident Keralites' remittances drives the State's economy. And from these characteristics come the philosophical and developmental directions of Kerala's budget proposals for 2007-08.

NRK FUNDS

The Finance Minister hopes to tap into non-resident Keralite (NRK) remittances to launch a new company - Infrastructure Kerala Ltd - to build up infrastructure for the development of information technology in the State.

In his budget proposals, Dr Isaac hopes to raise additional resources of Rs 248.69 crore through taxing transactions in commodities such as vehicles, property, tobacco products, luxury coaches, paper lotteries and granite quarries.

The Minister has targeted as much as Rs 6,000 crore in value-added tax (VAT) revenue in the next fiscal. From Rs 2,950 crore in the previous year, VAT collections in 2005-2006 (by provisional estimates) had risen to Rs 4,500 crore.

However, due to the dismal performance in tax collections in previous years, Kerala's total tax-GSDP ratio has been hovering around 11 per cent of GSDP since 2002-2003, even as those of neighbouring States are escalating, says the Economic Review.

FISCAL DILEMMAS

Thus, even as this year's budget proposals focus on protecting the agricultural and traditional sectors, and upgrading the general standards of public amenities in education and healthcare, Kerala is still faced with fiscal dilemmas.

During the period from 1995-96 to 2006-07 (up to December 31, 2006), the total debt of the State increased from Rs.10,113.54 crore to Rs.55,320.49. "The ever growing debt of the State at this rate is a matter of serious concern," the Economic Review warns.

The Finance Minister still has to resolve the fundamental dichotomy facing Kerala - the contradiction between a high overall growth rate and stagnation in the primary sector. This, as the Economic Review stresses, would not really matter if workers in the primary sector were able to shift into the faster growing sectors. However, this has not been happening in Kerala.

CHALLENGES AHEAD

Thus, even as Dr Isaac recognises that the major challenge in this year's Budget is to raise revenue receipts in order to speed up growth in the productive sectors and improve the quality of services, he still has to pump out more incentives so as to achieve the goal of a robust economy as the catalyst for revenue growth.

In theory, increased economic activity, coupled with lower taxes, will make up for lost revenue. But with inflation approaching an annual rate of 7 per cent that might work only in the short term. This year's budget proposals appear unlikely to be able to spur Kerala's economy into a new orbit of growth.

The writer can be contacted at kgkumar@gmail.com