Nissy Solomon & Praseeda Mukundan

Kerala Budget 2021-22, presented by Finance Minister Dr Thomas Isaac, comes in the backdrop of an ailing economy. All the hopes were pinned on the Budget to set the economy on the right course, especially post-COVID. As the last State budget of the LDF Government and with the Assembly polls just a few months away, the Budget tabled many populist measures to appease the masses. 
While the impact of the measures and proposals will take time to unfold, few areas presented in the Budget require closer attention.

Agriculture: Illusion of Solace

With an intent to provide higher remuneration to the farmers, the Government of Kerala has raised the Minimum Support Price (MSP) of Rubber, Paddy and Coconut in the Budget. The hike presents a range of unintended consequences and welfare implications. For example, higher support prices will incentivise farmers to increase their production while simultaneously reducing the demand of the consumers. This mismatch in demand and supply will lead to a surge in the production, which the government is expected to finance. Given the tight fiscal position of the State, a successful procurement operation is unlikely. Even if procurement operation of this surplus production is made possible, it will come at the cost of cutting other expenditure or investments. Conversely, if the government is ineffectual in its attempt (note: the government is not statutorily bound to pay MSP), the surplus production would flood the market, thereby crashing the prices of the products. Thus, the outcome of raising MSPs has many implications which will have direct consequences on both farmers and consumers alike.

Actual Constraints in the Education Space

Dr Isaac announced a slew of schemes to promote Kerala’s education sector with the larger objective to strengthen the education infrastructure. While the move can be an enabler in achieving quality education, it is not an end in itself.

Announcements in this sector included Rs 2000 crore aid from  Kerala Infrastructure Investment Fund Board (KIIFB) for universities’ infrastructure development, 1000 faculty to be appointed in the higher education sector, 500 post-doctoral Nava Kerala Fellowship with a monthly stipend of Rs 1 lakh, among others.  But challenges like ineffective teaching practices, unavailability of faculty in higher education, etc. stem from lack of substantial investments in the sector. There are considerable entry barriers for high-quality private education providers in the education space. With limited resources in hand, there is an increasing need to prioritise matters that require more attention, particularly in the policy realm. Through the decades, policymakers have been deliberate on having higher educational institutions being set up as non-profits. The challenges can be addressed if the State acts not only as a provider but also as a facilitator allowing more high-quality education providers to enter the market.

Employment Creation
According to the Centre for Monitoring Indian Economy (CMIE), the State’s unemployment rate increased to 26.5 per cent in May 2020, compared to the national average of 23.5 per cent. This is not a new phenomenon caused by the pandemic. The State is considered industry unfriendly and has been consistently registering the country’s highest unemployment rate. The latest closure of English Indian Clays Ltd (EICL) presents the ground realities of Kerala.

To address the unemployment issue, key announcements were made in the Budget, including skill development programmes for unemployed educated youths, promotion of startups, etc. However, without improving the business climate, a sustained income generation activity will remain a far-fetched vision.

Another point raised in the Budget speech regarding the startup mission was about the creation of a venture capital fund collectively by Kerala Bank, KSIDC (Kerala State Industrial Development Corporation), KFC (Kerala Financial Corporation), and KSFE (Kerala State Financial Enterprises).  It is mentioned that if loans extended by KSIDC, KFC and Kerala Bank to startups result in a loss, the government will cover up to 50 per cent of this loss. A fundamental problem of this approach is that it presents a moral-hazard element, which comes in response to government protection. The government’s guarantee to absorb the losses can encourage startups to undertake risky investments which may prove detrimental to the already debt-ridden State.

Urban Development, Infrastructure and Transportation

Though the Budget touched upon certain urban development provisions and infrastructure, this was clearly not a major focus area.  

As per the Budget, Kerala State Road Transport Corporation (KSRTC) will be given an assistance of Rs 1800 crore (an addition of 800 crore compared to the previous Budget); to an organisation which has consistently proven to be a loss-making inefficient business. At the same time, the private bus operators, who are in a dire financial situation as a result of the pandemic, are nowhere mentioned in the Budget. Providing them with the financial support (through tax exemptions and loans) was the need of the hour as buses remain the most commonly used public transport system in the State. Lack of any action from the government might compel most of them to withdraw bus services permanently, leading to severe consequences to Kerala’s economic growth and environmental health. The government also plans to convert 3000 KSRTC buses into eco-friendly CNG/LNG engines and an amount of Rs 50 crore is allotted for it. This might be a positive move if carried out efficiently. But let us not forget the challenges and failures faced in the case of electric buses leased. This could be a good case study to learn from and apply to execute the plan presented in the Budget successfully.

With e-governance initiatives, work from home, online education and shopping, etc., the pandemic has shown that the need for travel, to some extent, could be replaced by digital interventions. The Budget has also emphasised the importance of digital interventions through major projects and significant assistance: digital infrastructure, e-governance and skill development. Nevertheless, the government is going ahead with the Silver Line Semi High-Speed Rail Project worth Rs 60,000 crore. This might be an infrastructure project that kindles aspirations of having a world-class development in our State. However, prioritising this cost-intensive project, while overlooking the current areas of priorities, is a misguided objective. Similar would be the case with the proposed metro line connecting Kaloor Stadium and Kakkanad IT park in Kochi, mentioned in the Budget, at an expenditure of Rs 1957 crore.

The Sabari rail project mentioned in the Budget leaves an optimistic note to Keralites and pilgrims from other states. This long-pending project will provide better connectivity to the south-eastern part of the State and may lead to development activities in those areas. As the Union Government is not ready to fund the project entirely, the State Government will be allocating Rs 2000 crore for it through KIIFB.

The government has given a push to electric vehicles through the announcement of a reduction of 50 per cent motor vehicle tax for the newly registered electric vehicles for the next five years. At the same time, other vehicles’ tax rates, which was a major proposal during the last Budget, did not find any mention in the Budget. With the onset of COVID-19, the share of private vehicle users had gone up, which could have been controlled by introducing measures taken previously, such as increasing the tax rate. This could have checked the negative externalities caused by it, such as increased pollution, GHG emissions, congestion, and loss of revenue to the government.

Mounting Debt
The Budget has given generous allocation to welfare schemes and pension packages. This points to a crucial question on the State’s ability to finance. All the key projects and schemes proposed by the Finance Minister are banking on KIIFB. As per RBI’s state finance report, the State’s outstanding liabilities as a percentage of gross state domestic product are pegged at 30.8 per cent for FY21. Including the off-budget expenditures via KIIFB, the debt levels are even higher. Recalling the risk involved in funding startups via government entities like KSIDC, KFC and Kerala Bank, it is apparent that the State will have to bear the looming losses emerging from this initiative as well.

What Kerala needs is expenditure rationalisation and newer revenue generation models. The State has been seen spending more on revenue expenditure. The budgeted expenditure for 2021-22 is Rs 1.59 lakh crore, of which expenditure on revenue accounts amounts to Rs 1.45 lakh crore (91 per cent), leaving only 0.14 lakh crore for capital expenditure and growth recovery.  Owing to the pandemic, the State revenues were hit — evident from the revenue receipt (RE) of 2020-21 — and stood at Rs 93,115 crore, a decrease of 18 per cent from budget estimate of the same year. This year, the revenue receipts (BE) are proposed to be Rs 12,8375 crore, a 38 per cent increase from the preceding year. This budget estimation is rather unrealistic and signals a fiscal weakness. The financial difficulties grappling the State will have to be resolved by rationalising the State’s expenditure side.

Although the State has significant scope for economic growth, the government has little capacity to manoeuvre these proposed schemes. What is politically expedient for the party is practically unsustainable for the economy in the long-run.

Nissy Solomon and Praseeda Mukundan are Senior Research Associate at Centre for Public Policy Research. Samarth Khurana, Research Intern at Centre for Public Policy Research assisted in the Research. Views expressed by the authors are personal and need not reflect or represent the views of Centre for Public Policy Research.  

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