Kerala has breathing space of two years to sort out finances: State Finance Secretary

Vinson Kurian Thiruvananthapuram | Updated on June 20, 2021

Revenue deficit grants, GST compensation may help

Resource-stressed and debt-laden Kerala has a two-year window that affords some breathing space to return to the path of fiscal consolidation and steer itself to a phase of broad-based growth.

During a virtual discussion on the two 2021-22 state budgets hosted by the Gulati Institute of Finance and Taxation (GIFT), RK Singh, State Finance Secretary, said that a fortuitous combination of revenue deficit grants and GST compensation may have made the state's task that much easier.

Leading economists, academicians, technocrats and researchers attended the virtual session that poured over the budgetary allocations and policy programmes in the budgets presented by Thomas Isaac on January 15 and successor and current Finance Minister KN Balagopal on June 3.

Revenue deficit grants

The Finance Secretary recalled that the Finance Commission has sought to compensate the lower devolution figures to the state by granting it higher transfers in the form of revenue deficit grants. These however will taper down over the next two years.

"We also have a two-year window in the form of the protective revenue under the GST compensation regime. But this will start fading out by the middle of next year. So, basically we will have to return to the path of growth and control the runaway growth in revenue expenditure."

The state has tried to address some of the structural issues of the economy, Singh said referring to its legacy of chronically low capital expenditure contrasted by unconscionably high revenue spend and carried forward in the two budgets as the government returned to power for a second term.

Counter-cyclical strategy

In the face of the pandemic, it had tried to follow a counter-cyclical strategy in which it kept up spending on public works, social safety network and health, Singh said without responding to the larger issue that economist MA Oommen sought to raise in regard to same numbers and figures in the two budgets.

The current growth rate of 13 to 15 per cent in revenue expenditure must be brought down to 10 per cent during this period, Singh said. "This alone will help ensure that the Kerala model of development that has produced great results in the past is sustained."

The state's expenditure profile is such that a lion's portion falls under the category of committed expenditures. There's not much room for reduction other than cut down on permanent establishment and not create too many salary positions in the government in future.

Extending debt maturity

There may also be some scope for elongating the maturity of its debt profile and try to reduce the interest burden a bit. But other than that, as much as 61 per cent of the revenue expenditure that goes to fund the committed spends may remain fairly difficult to handle, Singh indicated.

"The debt to GDP ratio went up to 36 per cent in the last year mainly because we accessed an additional two per cent in borrowings subject to some reform parameters that we managed to achieve. Now, this is not unduly high compared to some other states," Singh stressed.

"There are other states which exceed 40 per cent; for instance, Punjab, Rajasthan, Uttar Pradesh and Bihar fall under this category. But we must also recall that those very states enjoy very generous levels of devolutions from the Finance Commission, which in our case are far less."

Projected growth rates

Singh however sought to paint a relatively brighter future saying that in its projections for different states, the 15th Finance Commission has bracketed Kerala along with projected class-toppers Haryana and Goa which it hopes will be able to grow at 13.1 per cent over the next five years.

"If we're able to achieve it, we should be able to be reach within striking distance of achieving the FRBM targets. Hopefully, the abatement of the pandemic and return to life of tourism that contributes almost 10 per cent to our GSDP should be able to reinvigorate our economy."

Published on June 20, 2021

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