Kerala is faced with ‘a do or die situation’ while budgeting for revenue and expenditure for fiscal 2019-20, according to Finance Minister Thomas Isaac.

A crunch situation materialised with the Goods and Service Tax (GST) regime delivering way below than the expected 20 per cent growth after being introduced two years ago, he told BusinessLine.

Adventurous strategy

The fiscal strategy followed has been rather adventurous, said Isaac. The state finance minister is midway through the preparation of his tenth budget at a seaside hideout away from the bustle of the state capital..

The fiscal consolidation path had continued till 2012-13. But, from 2013-14, things started to unravel - with revenue growth dropping sharply to 10 per cent from peak levels of 18 to 19 per cent.

"When our government came to power three years ago, we thought GST would help to improve revenue and may not need to compress expenditure," Issac said.

A policy of no compromise on social expenditure did not leave much for capital expenditure. The expectation was that this would be overcome through the KIIFB (Kerala Infrastructure Investment Fund Board) mechanism.

KIIFB is a government-owned financial institution set up to mobilise funds for infrastructure development from outside the state’s budgetary framework.

A major challenge

"You assure KIIFB continuous flow of future income, securitise it and use proceeds for capex. We hoped GST would improve revenues, put us back to fiscal stabilisation path and this would work. But it did not, and is now posing a big challenge of making up for the slack of the first three years and pushing tax revenue growth to above 30 per cent over the next two years. This may look preposterous, but 30 per cent-plus is the target that we’re looking at. If you dig slightly deeper into the numbers, you find this is achievable," commented Issac.

Why hasn’t GST grown in Kerala despite it being a leading consuming state? In contrast, why is it growing in Tamil Nadu, Telangana, Andhra Pradesh or Maharashtra?

Kerala may have started picking up but the growth is around 13 per cent only. "According to me, the binary involving classification into producing and consumption states is wrong," he commented.

Misnomer binary

All states are now consumption states. But their consumption is met largely from internal production which contains revenue leakage to the minimum.

However, in Kerala 80 per cent of the consumption is sourced out from outside, and check posts were abolished post-GST. Even three years down the line, annual returns have not been filed.

Without returns, how do you scrutinise declared assessments? Or purchase and sale vouchers? The first annual return will become available from June this year.

"Money may have leaked but is not lost. Our officers will work backwards and I expect that the gap with the protected level of revenue (14 per cent) would be made up this year itself."

The minister said he is proposing to ring in radio frequency identification (RFID) tags from June 1. By then, RFID readers would have been installed and no vehicle would be able to pass without being scanned.

RFID tags soon

This would plug leakages, and revenues could automatically go up to 27 per cent by next year. A series of amnesty schemes for an estimated Rs 1,500 crore should take it to above 30 per cent.

"If you do that, the revenue deficit will come below one per cent. Fiscal deficit will be contained at three per cent, bringing the state back to fiscal consolidation path."

So securing the borders through RFID and expanding the service tax base should be enough to able to reach the 30 per cent tax growth target and make up for the revenue loss of the first three years.

Capital investments through borrowing outside the budget become sustainable only if your budget is balanced, the state Finance Minister said.

"So this year we aim to bring down the revenue deficit by not necessarily by compressing expenditure. We will continue to provide enough for health, education and other social sectors," Issac commented.

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