Kerala’s travails with its finances can be explained in a nutshell as ’too-committed-to-be-fiscally-sound,’ attributable mainly to the disproportional share of its committed expenditure in salary, pension and interest payments. Finance Minister KN Balagopal may not have much options to set right this anomaly as he prepares to present the 2023-24 State budget on February 3.

An RBI report on State Finances stated that in 2021-22 (RE), Kerala topped a list of 17 major states in the country in terms of salary and pension outgo as a percentage of total revenue. While the average outgo for these states on salary was only 28.49 per cent, it was as high as 38.70 per cent for Kerala. Corresponding figures for pension were 12.22 per cent and 22.87 per cent respectively. 

Eats away 80.33 per cent of revenue

As for interest payments as a percentage, Kerala stands fifth on the list, points out Jose Sebastian, public finance expert and former faculty of Gulati Institute of Finance and Taxation, Thiruvananthapuram. These three items of expenditure takes away a massive 80.33 per cent of the total revenue. In contrast, the average for 17 major states was only 55.21 per cent. 

Kerala has relied on borrowing to meet developmental expenditure. With recent restrictions announced by the Centre on borrowing, the quality and quantity of public services may seriously suffer. The Finance Minister has reportedly written to legislators not to refer any project to be financed outside of the budget by Kerala Infrastructure Investment Fund Board (KIIFB). 

Restrictions on borrowing 

The Centre has not taken kindly to extra-budget borrowings by states and stated in clear terms that these loans would be considered part of their overall debt. This means that the borrowing limit of the state concerned would get reduced to that extent. Accordingly, loans of ₹12,562 crore raised by institutions, including KIIFB in 2021-22, will be treated as government loan. 

Mobilisation of resources during the previous government too had come under the scrutiny of Central agencies. The Enforcement Directorate (ED) had charged the KIIFB with violating Foreign Exchange Management Act (FEMA) regulations when it tapped the market by issuing ‘masala bonds’ on the London Stock Exchange. The ED had even issued a summons to former finance minister Thomas Issac in this regard. 

ED, CAG strictures 

The CAG too has repeatedly made critical comments on KIIFB since these funds raised/borrowed were to be repaid from the petroleum cess and part of motor vehicle tax set apart by the State Government from its own revenue resources for transfer to KIIFB. It had said that overall public debt had grown 62.51 per cent from 2016-17. KIIFB and other institutions have added to it.

The pay and pension revision of 2021 aggravated the fiscal stress, Sebastian said. The salary and pension bill in 2020-21 was ₹46,691.14 crore. Estimates for 2021-22 (RE) show a leap form 52.63 per cent to ₹71,235.03 crore. “The government could have easily postponed the pay revision citing severe economic slowdown caused by two floods and Covid-19 pandemic,” he opines. 

Also read: Kerala Budget: Huge ‘committed expenditure’ limits capacity to spend on productive sectors

Poor debt sustainability

The moot question is not the current level of debt per se but its sustainability since Kerala is aging fast. Already, the proportion of people above 60 years of age in the state is high. By 2030, it is likely that 20-23 per cent of the population would be above this threshold. This rules out major gains on the demographic dividend front, which is a dampener, Sebastian says. 

The track record with own resource mobilisation doesn’t inspire confidence either. During the first 10 years since formation, Kerala enjoyed 4.45 per cent share in own resources mobilised by all the states. But this fell to 3.87 per cent as per 2021-22 (RE). In contrast, in 1972-73, the state was eighth among major states in per capita consumer expenditure. It climbed to the first in 1999-2000 which has retained till date. The fall in resource mobilisation needs to be viewed against this growth in fiscal potential, he added.