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Treasury controls are back in force in Kerala again in order to prevent a fiscal collapse. What stands out this time is that it comes at the beginning of a financial year, which would have been avoidable if the state’s finance managers had been more prudent, says Jose Sebastian, public finance expert.
A close look at the fiscal management during the last two years bears testimony, Sebstian told BusinessLine. Contrary to popular perception, revenue receipts had registered an impressive growth during the peak of the pandemic.
Total revenue up
“While total revenue grew 8.19 per cent in 2020-21 over 2019-20, it rose by a whopping 20.77 per cent in 2021-22 (revised estimates) over 2020-21. While the state’s own revenue jumped 25.31 per cent, the Centre’s share lagged at 14.90 per cent. This shows that, despite the pandemic, Keralites did consume more and contribute towards public purposes,” Sebastian explained.
Then what explains the present crisis? He points finger at the state’s bugbear — high spending on salary and pension, which was ₹50,470.73 crore, or 56.24 per cent of the total revenue, during 2019-20. It had fallen to ₹46,671.14 crore, or 47.81 per cent of total revenue, during 2020-21.
What may have reducedthe outgo is the retirement of government employees and a recruitment ban introduced as part of fiscal management. It is as if the state was on a path of fiscal consolidation, but additional expenditure by way of pay revision created unexpected bumps, Sebastian said. The state revises pay once in five years, unlike once in 10 years at the Centre. A pay revision was due from July 2019.
Pay revision frequency
“The state had a valid justification to postpone it. First, it was emerging from the ravages of successive floods. Second, the pandemic and the subsequent lockdown had nearly paralysed the economy. Third, the previous Pay Commission had recommended pay revision once in 10 years, as practised elsewhere. The government could have brokered a grudging consent by talking to the powerful service organisations. Merely postponing pay revision would have made available ₹20,000 crore, sufficient to revive the economy.”
But the political class predictably chose the tried and tested path. After all, the pressure to win a second term was too strong to resist, says Sebastian. “If it had to be secured at the cost of the state’s fiscal balance, so be it. Pay Commission recommendations pumped up the salary and pension bill to ₹71,235.03 crore. Additional expenditure incurred is ₹24,563.89 crore, 52.63 per cent higher than the previous year’s.
Propensity to spend
Salary and pension expenditure as a percentage of total revenue has gone up from 47.81 per cent to 60.43 per cent. Only a small percentage of the increased salary and pension will come back to the market since the spending propensity of the salaried class is much lower than that of ordinary people. As for pensioners, they are largely keeping away from mass consumption.
Had welfare pensions been raised from ₹1,600 to, say, ₹2,500, the entire amount would have found its way to the local market. This would have revived the market, bringing in higher tax revenue, opening up a virtuous cycle of consumption, economic growth and development. Kerala would need to pay dearly for this wasted opportunity for fiscal consolidation, Sebastian warns.
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