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The Vikasarth Conversations 2022
March 1, 2022
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March 8, 2022Kerala Budget 2022: Why major reforms need not be expected
Rahul V Kumar & Dr D Dhanuraj
Off budget borrowings through KIIFB, CAG reports and finally the acceptance of the state government indicates the dire financial situation of the Government of Kerala. The Government is desperate to generate revenue to offset a looming economic catastrophe. The revenue and fiscal deficits are beyond acceptable levels. The Government has a breathing space only until the forthcoming budget to develop a convincing strategy to tide over the crisis. Therefore, the budget becomes an anticipated document to see the course of government action. There are three questions in this context – What will be the long term strategy of the Left government in its full budget in the second term? What should be the path for recovery? Are there indications that major economic reforms are in store?
The government’s strategy as of now is to woo investors by removing obvious obstacles in their path. It also aims to bring high profile projects like silver line to generate investment and employment. There is nothing new in using infrastructure development projects to accelerate growth. However, the environmental fragility, displacement of population and the long term returns from such projects will not solve the immediate problems in Kerala. These could, in fact, aggravate the concerns of the government.
So, what do we expect in the forthcoming budget? What are the possible strategies to correct the revenue and fiscal deficits? Revenue deficits can be compensated only by raising revenues or cutting down expenditure. Suggestions from experts vary from restructuring the price of utilities (e.g., electricity) to making the taxation system more efficient, or to introduce new taxes that could broaden the base. But it is naive to expect such a change in the taxation system to be practical in the near term. Explicit tax collections are likely to further bog down individuals amidst the current crises. So even if taxes are levied they are likely to be discreet. What about reducing expenditure? There are voices in our state which points out that salaries to the staff of government and aided institutions are a major burden and needs some kind of streamlining. However, the government will be wary about such a streamlining due to strong political hurdles.
So, is there any definite path for recovery? If the damage needs to be reduced, the budget should be more a signal/indicator to investors to consider the possibility of investment in Kerala. How can this message be delivered? Even though the government has strong sentiments in sustaining the non-performing PSUs, it should boldly withdraw ownership from at least two of the heaviest loss-making units. This is a clear signal to investors that the government is making an exit from doing business. The path of recovery should also focus on Kerala’s comparative advantages; especially in health and education. We boasted of our oxygen surplus status during peak demand because we had a huge private plant producing oxygen (INOX). Why not identify specific demands in the health sector by linking health practitioners with entrepreneurs? It is noted that a lot of start-ups in our IT parks have focussed on providing software services to the health sector and have been able to raise considerable funds from abroad. This indicates large market for such services. Why not tap such potentials by understanding the requirements from our own health sector? Signals should also attract foreign investors in education and make higher education competitive. The government need not embark on a costly knowledge economy mission. Rather the aim must be to facilitate willing players to develop the system into a knowledge economy.
But should we expect the government to take this course? Broadening the tax base or curtailing the existing expenditure is not just an accounting question waiting to be solved; it has political dimensions. Big bang reforms in the tax or price front need not be expected from the government due to these political hurdles. The government would try to expand investments in infrastructure projects (including its rail and internet projects). These actions are likely to be applauded too. Recent actions of the government also indicate that they will continue to tread the normal course. For instance, the government now plans to rent luxury buses anticipating that KSRTC could face stiff competition from private services which could benefit from the aggregator policy of the Centre. It also plans to go ahead with the silver line project irrespective of possible economic, social and environmental costs. Recent reports also indicate that the government is willing to refurbish a closed centrally owned PSU (Hindustan Newsprints Ltd). These are strong indications of what we need to expect from the government in the near term. If the Left government understands the current crisis, the forth coming budget should not be a document to bog down individuals through higher prices and taxes, nor with displacements and environmental costs. Such actions could be politically decisive even with a weak opposition.
Dr D Dhanuraj is Chairman and Rahul V Kumar is Research Fellow (Market Economics) at Centre for Public Policy Research. Views expressed by the author are personal and need not reflect or represent the views of Centre for Public Policy Research.
The malayalam version of this article was published in Manorama Online on February 20, 2022. Click here to read
Rahul V Kumar is a Research Fellow at CPPR. He has an MA in Economics and an MPhil in Applied Economics and International Relations from Jawaharlal Nehru University (New Delhi). Currently, he teaches graduate students.
