Kerala economy in good shape despite ‘deficit' drag, say analysts

Our Bureau Thiruvananthapuram | Updated on February 15, 2011


Leading public-finance policy analysts have termed as ‘good' the health of the Kerala economy as reflected in the 2011-12 Budget presented to the State Assembly by the Finance Minister, Dr T. M. Thomas Isaac, on February 10.

The analysts aired their views at a public debate organised here on Monday by the Gulati Institute for Finance and Taxation (GIFT).

Piloting the debate, Dr K. P. Kannan of the Centre for Development Studies, said Kerala is ranked fourth among frontline States in terms of per capita own-revenue and the efficiency with which tax is collected.


While this is commendable, he was of the view that the State would need to further improve the efficiency of collections since it needs to borrow not just for meeting capital expenditure but also for revenue expenditure.

Own-tax revenue and tax efficiency is a major yardstick for assessing growth performance, where Haryana scores highest among the States with Rs 5,955 in tax being collected/person in 2009-10.

Tamil Nadu came in second with Rs 5,795; Karnataka third with Rs 5,624, followed by Kerala at Rs 5,327. Compared to this, West Bengal with Rs 2,217, was way down in the ranking, Dr Kannan said.

The Kerala economy has been growing at a reasonably fast clip of eight to nine per cent in recent years (6.7 per cent during the recessionary year against the national average of 6 per cent).


The gross state domestic product has recorded a 13 per cent growth during the last five years, which is remarkably good. Own-tax revenue has grown at an even smarter 14 per cent at nominal prices.

Tax buoyancy, though, has remained constant over the past 10 years, Dr Kannan observed. Disproving worst fears of critics, value-added tax has only helped fuel tax collections, pushing sales tax behind.

Non-revenue tax collections have largely been able to keep pace. Despite all this, there is a huge gap between what the State has been able to achieve and its true potential in terms of collections.

For instance, while sales tax accounts for 70-72 per cent of own-tax revenue, only two-thirds of the potential is being tapped. This is mostly the case with other heads of taxes also, Dr Kannan said.


The sales tax collections are sourced in equal share from the public and private sectors. In the latter, though, leakage/evasion has been found to be as high as 65 per cent. Dr Kannan put a tab on revenue thus foregone at Rs 7,000 crore.

In the case of gold, the tax income amounts to but a pittance on a ballpark figure of Rs 20,000 crore in annual turnover. The State should have collected a minimum Rs 735 crore under this head, Dr Kannan said.

The Finance Minister may appear to have played the ‘welfare' card to the hilt to woo the masses. But the margin for this was limited, Dr Kannan observed.

Instead, additional allocations under salary, pensions and interest payment have scooped up a big chunk of the funds (around Rs 7,200 crore).


As for the revenue outlook, he said the gap of four per cent between an expected 20 per cent rise in revenue income and 24 per cent in revenue expenditure would need to be met by borrowings.

Using borrowed funds to meet revenue expenditure is not fiscally sustainable.

Failure to comply with the milestone revenue/fiscal deficit targets over a period of five years would deny Kerala the State-specific grant of Rs 1,500 crore announced by the Thirteenth Finance Commission.

But the silver lining is that the State can afford to mark up its own borrowing capacity in tandem with the broadening of tax base and increased efficiency in collections that gets reflected in absolute numbers, Dr Kannan said.

Published on February 15, 2011

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