It was a closely watched speech that Dr Thomas Isaac made today as he was presenting the fourth budget of the present LDF government of Kerala. Much so for the reason that it was his first after last year’s devastating floods that has plunged an already debt-ridden state into greater fiscal crisis. A lot of expectations had surrounded the budget with the hope that the Pinarayi Vijayan government would come up with innovative measures to rebuild a new Kerala. The question is how far the budget has delivered in meeting the expectations?
With the objective of building a new Kerala, 25 projects were announced by the Finance Minister. Yet, most of the projects were extensions of older projects with an increased budgetary allocation. One of the major announcements was with regard to industrial parks and corporate investment. It is a positive signal that the government has finally accepted the need for private investment in the state. Kerala registers the highest unemployment rate in the country, higher than the national average, and it is simple economics that the government cannot be the sole employment provider. Private investors should be provided with an ecosystem for doing business and the state should have the political will to remove the tag of a business unfriendly state.
The government’s aim of doubling the income of the people of Wayanad by procuring coffee beans at a higher than market price might sound good, however it will only eventually kill the sector. The same policy has been implemented in sectors such as cashew, coir, and paddy and the over intervention by the government has only destroyed those sectors. The budget also proposes the same policy for procuring coconuts. And there is no estimation of how much it might cost the exchequer. The government’s push for mechanization of the coir sector should be considered as a welcome sign. However, there needs to be a different approach in addressing the issues in traditional industries; subsidies and packages will not bring any relief to the sector.
Public Sector Units (PSUs) also got a mention in the 25 projects to build a new Kerala. Though the Finance Minister is confident in turning around more PSUs into profit making units, the financial burden this process might have on the exchequer has not been properly factored in. Most of the PSUs are highly dependent on budgetary support even to carry out their day to day operations. As per Economic Review 2018, the total profit generated by the PSUs in the state stands at Rs 382.8 cr, whereas the total loss incurred stand at Rs 2216 crore. In this context, a serious discussion should be carried out in disinvesting loss-making units, even though in his speech the Finance Minister has outrightly said that none of the PSUs would be disinvested.
It should be also noted that in most of the 25 projects announced by the Finance Minister, Kerala Infrastructure Investment Fund Board (KIIFB) has marked its presence. Considering the nature of schemes, it needs to be looked into how successful KIIFB will be in repaying the loan amount. There was also no mention on the total amount that KIIFB was able to garner from the market or through Pravasi Chitty. It means that KIIFB is still highly dependent on motor vehicles tax, petrol cess, and grants from the government. The infrastructure development costing Rs 11,000 cr is routed through KIIFB, it needs to be looked how successful KIIFB will be in executing these projects considering the shortage of funds.
The budget also pushed in the usage of e-vehicles by giving tax concessions and proposing the plan for converting KSRTC buses into electric buses. A tax concession for private e-vehicles will lead to more e-vehicles on the street and an increased demand for electricity. This will also be at the cost of diverting this money to strengthen public transport. But how far the state will be able to meet the increased demand for electricity as the budget itself has stated that Kerala’s dependence on outside electricity is increasing. In his budget speech, the Finance Minister however mentioned the usage of LED bulbs over CFL bulbs to contain the increased demand for electricity. Much thought should go into this proposed policy as it is a repeat of what the government had done to replace incandescent bulbs with CFLs a few years ago; a true example for the Keynesian model that Kerala practices.
As expected, the Finance Minister didn’t cut down expenditure but mentioned a growth rate of around 12 percent. On the other hand, deficit targets were lowered, with fiscal and revenue deficit at 3 and 1 percent of the GSDP. Government plans to meet the deficit targets by expecting a huge increase in its revenue receipts. The state is expecting a 27 percent increase in GST collection in the coming financial year compared to 2018-19 (RE). It needs to be looked at how far the government will attain the ambitious deficit targets merely by expecting an increase in receipts.
With the tax rate on all foreign liquor increased by 2%, state excise is expected to register a growth rate of 15 percent. The government has also imposed a flood cess on the supply of goods in the GST tax bracket of 12%, 18% and 28% and all services. This would clearly lead to an increase in price levels and add to inflationary pressures. If the argument that cutting down the expenditure will push the economy to the crisis, the same argument could be applied in the case of additional cess applied across various goods and services for an economy that has just begun to recover from the devastation caused by the floods.
By and large the budget has so many announcements which lack the sound economic principles. The welfare schemes are growing while the per capita income of Kerala is growing whilst the state ponders over how to fix the losses due to the floods. Many of the provisions lack public policy decisions from the Government side which are imperative before announcing them. The situation leads to contradicting viewpoints to meet both the ends of fiscal management and growth of the economy.
A shorter version of this article was published in The New Indian Express
Deepthi Mary Mathew is Senior Research Associate at the CPPR Centre for Comparative Studies. She has an MA in Economics from the University of Kerala and is also a PhD scholar at the Gokhale Institute of Economics. She can be contacted by email at email@example.com or on Twitter @DeepthiMMathew