Kerala’s capital woes

Vinson Kurian | Updated on April 25, 2019 Published on April 25, 2019

Revenue imbalance is hurting infra spending

The unseemly controversy over a Kerala Government-owned entity (Kerala Infrastructure Investment Fund Board, or KIIFB) raising offshore rupee borrowings (or masala bonds) of ₹2,150 crore has helped bring into sharp focus the emerging unpleasant, if potentially apocalyptic, truth — the famed ‘Kerala model’ is unravelling, finally.

Spendings on wages, welfare and the social sector have become well-entrenched that successive governments are compelled to not just maintain but also revise them upwards. The inevitable casualty has been the infrastructure and manufacturing sectors. The deficit in capital spending has left the State in crying need for infrastructure and jobs even while it had to reverse migration of educated youth. The preponderance of revenue spending has constrained the budget from earmarking resources to deal with these.

Right now, it corners as much as two-thirds of the borrowing, leaving only one-third for capital expenditure. The national average for capital spending is around 2.5 per cent for all States while it is 1.2-1.3 per cent in Kerala — it was below one per cent as late as until 2014-15. This is why the State has sought a way out by looking to raise badly-needed funds outside of the budget, which is exactly the mandate for KIIFB.

The Centre’s Medium Term Fiscal Policy, 2018, had suggested that capital expenditure should be funded preferably off budget, a practice that allows the government to overshoot expenditure while maintaining the budget deficit targets. But the repayment should be self-financed. Kerala’s path is slightly different — it would use these funds also for spending on social infrastructure while taking care to correct the revenue imbalances.

This would help it use up more and more of the borrowing limit for capital repayment. This requires reversing the tendency to utilise a substantial portion of borrowing for revenue spending.

The crucial issue at stake is correcting imbalances in the revenue account by sticking strictly to a projected growth of at least 20 per cent in tax revenues (the State budget for 2019-20 aims at a highly optimistic 30 per cent growth). The current rate of growth rate of revenues is around 10 per cent, unacceptable for a consumerist State.

The only choice is to correct the revenue account through robust mobilisation or pause capital expenditure to the basic minimum, if not entirely stop it. There’s no money available to fund infrastructure since domestic borrowing limits have been breached.

This explains the compulsion to resort to KIIFB for infrastructure funds. The idea is to create some fiscal space outside the budget even if it means constraining future streams of revenue (motor vehicle tax and excise, for instance). The State must get into ‘mission mode’ to raise growth rate of revenue receipts to over 20 per cent during the next two to three years.

A message should go out explaining the vital need to curtail runaway spending. Alongside, tax compliance has to improve. Inexplicable laxity on the GST front and a tendency for evasion have to be addressed. The government needs to reach out to the public. Also, it must make organised traders who resist GST enforcement stakeholders in the mobilisation exercise and evolve a new Kerala model here as well.

After all, from 2013-14, there has been stagnation in revenue growth. The State has to come out of it; else, its future is bleak. The current controversy over the masala bond doesn’t help. Political parties need to introspect on them with a different perspective.

Published on April 25, 2019
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