Covid-19 creates a big hole in Kerala’s finances, accentuates stress

The pandemic marks a new low in fiscal derailment in Kerala that started in the early years of the previous decade. No other Indian State would probably be in such unenviable fiscal stress.

Revenue sources have all but dried up and the State has gone in for deferment of a part of employee salary. In all probability, it would have to borrow to pay salary and pension in the coming months.

And thereby hangs a tale, said Jose Sebastian, public finance expert and former faculty member of the Gulati Institute of Finance and Taxation, Thiruvananthapuram. Salary and pension expenditure doubles every five years and this is reflected in the outstanding liabilities of the State, he told BusinessLine .

Interest burden up

“When salary and pension are paid out of borrowed funds, the interest burden also goes up. Since interest burden is part of committed expenditure, the State is left not with much options. Committed expenditures eat away whatever resources it mobilises from liquor, lottery, petrol and motor vehicles, which together account for almost 60 per cent of the State’s own revenue,” said Sebastian.

With the lockdown in full swing from the last week of March, even these revenue sources have dried up. This makes the State even more dependent on borrowing to fulfil the committed items of expenditure.

“Government employees and pensioners form less than 5 per cent of the State’s population, but are the single most important vote bank of the political fronts that have ruled the State by turns. The pity is that it is left with little resources to feed the rest of its people,” Sebastian said.

Passes FRBM Act

An impression is gaining ground that Covid-19 has caused the present fiscal impasse. Far from it, said Sebastian. “The Centre passed the Fiscal Responsibility and Budget Management (FRBM) Act in 2003, which required State legislatures to follow suit. Kerala passed it in 2003 itself. The Centre later adopted a policy of incentivising fiscal discipline by writing off debts of States in proportion to the reduction in revenue deficit,” he recalled.

The Congress-led United Democratic Front government passed the legislation in the State Assembly and initiated some concrete steps towards fiscal consolidation. A major one was the introduction of a contributory pension scheme. But, one of the first steps taken by the Left Democratic Government (LDF) that came to power in 2006 was to repeal it and restore the old pension scheme.

Borrow and spend

The LDF government dubbed the FRBM Act a piece of legislation with a ‘neo liberal’ agenda. It instead chose to embark on a fiscal path of ‘borrowing and spending’ rather than ‘taxing and spending’. This was at a time when most State governments had launched efforts to aimed at fiscal consolidation by raising own resources and pruning public expenditure.

Kerala, along with Punjab and West Bengal, could not achieve the 12th Finance Commission target of eliminating revenue deficit by 2007-08. The 13th Finance Commission proposed an adjustment path for these States that required them to eliminate revenue deficit by 2014-15. Kerala failed to achieve this target, too.

Revenue deficit grant

The 14th Finance Commission awarded a revenue deficit grant to Kerala along with 10 other States. It projected a zero revenue deficit for 2018-19, but what Kerala came up with instead was a revenue deficit is ₹1,7462 crore. The single most important reason for Kerala’s failure in fiscal consolidation is the uncontrolled growth of salary and pension expenditure.

In 2017-18, while the average salary and pension expenditure as a percentage of total revenue of major Indian States was 40.83 per cent, in the case of Kerala, it was as high as 62.98 per cent. Neighbouring Karnataka spends only 23.49 per cent on this count. Salary and pension expenditure is the main factor driving the growth of Kerala’s outstanding liabilities as well.

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