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Covid-19: Kerala needs to infuse ₹13,641 cr to breathe life into economy

Vinson Kurian Thiruvananthapuram | Updated on May 20, 2020

Post-Covid-19, Kerala would need to immediately infuse a princely ₹13,641 crore to restore any semblance of order into its tattered economy and nurse back to health a large number of own enterprises and establishments in manufacturing, trade and other services.

This was revealed in a report on the state of its finances mandated by the State government to think-tank, Gulati Institute of Finance and Taxation (GIFT), Thiruvananthapuram, and co-authored by K J Joseph, Director; D Narayana and AV Jose, Honorary Professors; N Ramalingam and L Anitha Kumary, Associate Professors, GIFT; along with Pinaki Chakraborty, Chief, Social Policy, Unicef, Chennai.

All-pervading impact

The purported objective of the analysis was to assess possible impact of the Covid-19 pandemic on State finances with a focus on revenues in the ongoing financial year, 2020-21. These in turn crucially depended on the GSDP (Gross State Domestic Product) that was impacted through supply shock and demand shock. These have inter-sectoral, intra-sectoral and inter-temporal dimensions contingent on sector-specific characteristics.

The study assessed that the state’s primary sector would need an additional ₹3,000 crore to support the painful path to recovery. This would obviously lead to a further increase in deficit and debt for an already overburdened fisc. The study considered three scenarios of value-added loss; the first took into account the loss during the first 47 days of lockdown only.

Three separate scenarios

The second considered, in addition to the above, loss during three more months with the assumption that most sectors would need at least as long to return to the normal growth trajectory. The third assumed that in select sectors like tourism, entertainment and travel, the adverse effect could last for up to six months after the lockdown. Since the first scenario is too optimistic projecting an estimated loss of only ₹79,971 crore, the study preferred to focus on the second and third scenarios.

Assuming that most of the sectors will take at least three months to return to normal growth trajectory, the study estimated that the GSVA (Gross State Value Added) would be ₹1.35 lakh crore, recording a nominal growth rate - 5.13 per cent and inflation-adjusted growth rate of -10.13 per cent.

Tourism, travel, entertainment

The total revenue is estimated to decline to ₹81,180.5 crore from the Budget estimate of ₹1,14,636 crore (2020-21, BE) leading to a shortfall of ₹ 33,455.5 crore. Of this, ₹19,816 crore is from GST and ₹7,451 crore is in Central tax devolution. Three other important items with projected shortfall in revenue are sales tax on alcohol (₹1,657 crore); sales tax on petrol and diesel (₹1,517 crore); and stamp duty and registration (₹1,292 crore). These three revenue heads are the main pillars of the state’s economy.

The third scenario assumes that in select sectors like tourism, entertainment and travel the adverse effect will be lasting for six months after the lockdown. Assuming that budgeted expenditure for the fiscal remains intact, given the revenue shortfall, the budgeted revenue deficit increases from 1.55 per cent to 5.88 per cent in scenario 2, and 6.11 per cent in scenario 3. As for fiscal deficit, the budgeted deficit increases from 3 per cent to 7.59 per cent in scenario 2, and 7.8 per cent in scenario 3.

Projected outstanding debt

In the third scenario, the total loss in GSVA increases to ₹1.62 lakh crore (18.5 per cent of GSVA) with a nominal growth rate of -8.56 per cent and real growth rate of -13.56 per cent. After accounting for the revenue deficit grant of ₹15,323 crore, the revenue deficit, fiscal deficit,and outstanding debt would be 4.18 per cent, 5.95 per cent and 38.92 per cent respectively in scenario 2. In the case of scenario 3, the corresponding figures would be 6.11 per cent, 7. 87 per cent, and 40.85 per cent respectively.

Published on May 20, 2020

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