There’s need to deepen people’s understanding of public finance

Kerala cannot hope to continue with the fiscal policy that it has been pursuing for the last half a century. There is need to deepen people’s understanding of public finances, says Jose Sebastian, Senior Faculty at the Gulati Institute of Finance and Taxation, Thiruvananthapuram, in an interview.

He shared his views with Business Line in the run-up to the State budget for 2015-16, which is scheduled to be presented in the State Assembly on Friday. A deeper commitment to contribute towards public purposes will have to be negotiated with the people, Sebastian says. This task cannot be left to the Finance Minister or a few tax collection officers.

The State should ideally go back to the more balanced revenue structure that existed in 1960-61. More public resources need to be mobilised from direct taxes and non-tax sources. Non-tax sources hold considerable promise for the State. Subsidies are going to the rich and middle class. It is to this section that public resources in the form of salary and pension are also going. So there is a strong case for better targeting of subsidies, Sebastian says.

Your assessment of the fiscal scenario of Kerala in the backdrop of the State Budget 2015-16.

The fiscal situation is precarious but there’s no denying that 14th Finance Commission’s award of ₹9,500 crore as deficit grant for three years from 2015-16 is a great relief. During 2015-16, an amount of ₹4,500 crore will be available to the state. This will provide some cushion to the pressure of additional expenditure from implementation of Pay Commission recommendations.

If some additional revenue can be mobilised, the state will be on the right track to wiping out revenue deficit by 2018-19 as mandated.

Have Finance Commissions and Planning Commission awards worsened the State’s plight?

By their very nature, Finance Commissions are bound to be ‘hostile’ to Kerala. Their main mandate is to make recommendations towards progressive fiscal transfers to poorer states. The Finance Commission has to ensure a minimum level of public services across the country.

But as a State, Kerala has achieved most of the UN millennium development goals. So, it is understandable that it forfeits allocations meant for reducing infant mortality or, for that matter, improving the level of literacy.

So, has the State has chosen a different trajectory of growth with not entirely desirable results?

During the last 50 years of planned development, the State has been investing heavily in social infrastructure such as education and health. Most others were busy developing physical infrastructure for agriculture and industrial development. Having embarked on a development strategy markedly different from others, it is incumbent on the State to find a way out of the fiscal stress.

Some economists have argued the case for a development maintenance grant.

Yes, economists MA Oommen and KK George have argued for quite some time for a development maintenance grant for the State since achievements in the social sector are the result of sustained public expenditure in health and education. The high non-Plan revenue expenditure arises from the high salary and pension commitments of teachers and health workers.

The State does not have the resources now to maintain its social sector in good shape. This calls for support from the Centre.

What are the concerns when it comes to mobilising additional resources?

Here, one has to be aware that revenue from commercial taxes has taken a hit from e-commerce transactions. Then there is the impact of fall in rubber prices. Over the years, the State’s revenue structure has undergone a change. In 1960-61, tax revenue contributed 56.5 per cent while the contribution of non-tax revenue was 43.5 per cent.

Of the tax revenue sources, direct taxes contributed 23.4 per cent and 32.6 per cent. In 2012-13, the share of tax revenue registered a sharp increase to 87.7 per cent matched only by a drastic reduction in the share of non-tax revenue to 12.30 per cent. A similar variation is visible in the mix of taxes. While the share of direct taxes plummeted by 15.8 per cent, that of indirect taxes streaked in the opposite direction to 70.5 per cent.

What are the implications?

Narrowing of the tax base, in the main. Within the tax revenue sources, petrol and liquor alone contribute almost 38 per cent of the state’s own revenue. Lottery is the single most important source of non-tax revenue. These three items together contribute 42 per cent of the own revenue of the state.

What does this mean in terms of tax burden on different sections of the population?

Both petrol and liquor are handled by public sector enterprises. So the incidence of tax evasion and avoidance is very marginal with both. Lottery is directly handled by the Lottery Department of the government.

Now, major consumers of liquor and lottery belong to the poor and the marginalised. Most of them are ‘addicted’ to both. Liquor is taxed at 135 per cent in addition to State excise duty. This means that the poor are contributing substantially to the exchequer.

But don’t high levies go to discourage consumption of liquor?

They should, but liquor is something they can’t do without. High tax rates in such cases are not likely to reduce consumption. Expenditure on food and other consumption in the family are curtailed to accommodate liquor. In effect, the state is mobilising resources at the expense of consumption by women and children of poor families.

There is a general impression that Kerala is straining under a tax burden.

That is wrong. The real test of the fiscal health lies in its having adequate revenue income to finance revenue expenditures. Kerala has shown up some of the highest revenue deficits. But it is also among the top in terms of the capacity to pay taxes. National Sample Survey Organisation data shows that it has been consistently been number one from 1999-2000 in consumer spending.

One major indicator of the level of public resource mobilisation is total revenue to Gross State Domestic Product ratio. As per revised estimates for 2012-13, Kerala’s ratio is 13.82 per cent against 16.35 per cent of Karnataka and 14.51 per cent of Andhra Pradesh.

Will Goods and Services Tax be of help?

Not really. This is based on the premise that Kerala is a service sector-oriented economy. But a study by the Gulati Institute shows that it is unlikely to benefit substantially for two reasons.

One, service providers here are small and most of them would fall below the threshold limit of ₹10 lakh. Two, most of the taxable services are associated with manufacturing activity and here Kerala is at a major disadvantage. This is also evidenced in the fact that the state collected just 1.30 per cent of the total service tax collection in the country during 2012-13.

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