The Centre for Comparative Studies (CCS) organised an in-house talk on “Political Economy of Kerala’s Fiscal Stress”, delivered by Dr Jose Sebastian, a seasoned writer and a retired senior faculty from Gulati Institute of Finance and Taxation, on August 8, 2019 from 4pm–6pm at CPPR office. Speaking on the persistent fiscal crisis that the Kerala government has been encountering in the last few decades, Dr Jose Sebastian, pointed out that the deterioration of this fiscal health is attributed to the failure of public resource mobilisation and prevalence of non-planned revenue expenditure. Kerala’s coalition politics that thrives on competitive populism and fiscal illusion, along with the methodological limitations and underestimation of Kerala’s fiscal potential have collectively affected the fiscal health of the State.
The revenue receipts of the State as a percentage of revenue expenditure in social service, namely health and education have sharply declined over the years. The speaker mentioned that there is a high non-planned expenditure in the field of social and community service. During 1972–1982, the government collected 5.6 per cent as fee in the services provided in health and education. It has now come down to 1.65 per cent. If Kerala levied the same fee as in the 1970s, the revenue base would have widened. However, it further narrowed down to just four commodities.
As per the data, 58.78 per cent of the revenue was mobilised from Petroleum, Liquor, Lottery, and Motor vehicles, where Liquor and Lottery contributed the highest share (44.4 per cent). Shedding light on one component of Kerala’s revenue generation, Dr Jose Sebastian presented the data from Kerala State Beverages where it was found that liquor is charged 10 times the actual purchase price. In a state like Kerala, where even the lowest-paid casual labourer resorts to the habit of alcoholism, the burden of tax falls on the poor. It comes at the cost of their livelihood, thereby making the poor poorer. Given this, it is ironic to learn that the State with its popular left progressive principles mobilises more money from the poor than any other states in India.
In further dissecting the State’s economy, the speaker brought another dimension to the fiscal imbalance by analysing the socio-cultural element in the geographic regions of Malabar and Travancore-Cochin respectively. With 44 per cent of the State’s population, the Malabar region contributes 32.45 per cent to the State, while the Travancore-Cochin region accounting to 56 per cent of the total population contributes 67.53 per cent to the State. The statistics points to regional and communal imbalances in the State. The lowest per capita liquor sales are in the districts of the Malabar region predominantly consisting of the Muslim population. He based his argument on the ground that culturally and religiously Muslims are prohibited from liquor consumption and lottery practices. On the other hand, Travancore-Cochin has a higher concentration of the Christian and Hindu community. The figures are, therefore, reflective of this religious and cultural dimension of the region. It is a paradox that although Muslims meet the government’s objective of discouraging liquor by levying higher tax, they are doing a disservice to the economy by not contributing to state finances.
The current revenue structure interferes with people’s faith and religious practices. He proposed that a secular system needs to be in place where every community contributes to the State equally. A secular revenue structure like property tax, agricultural income tax or professional tax should be introduced to generate revenues that is neutral to communities and religion.
In addition to this, there is a glaring imbalance in public expenditure. Kerala has a significantly high per capita expenditure on pension and salary as opposed to the other Indian states. The Travancore- Cochin region receives 74.78 per cent from the treasuries while the Malabar region receives only 25.22 per cent. He explains that the difference is due to the presence of aided institutions in these regions. Thirty-one percentage of the total expenditure on salary and pension goes to aided education.

As per the distribution, the Malabar region sees a significantly less number of aided colleges compared to the Travancore region. Upon a closer study, it was observed that the community and region-wise distribution of population and expenditure on salary and pension favour the Savarna Hindus and Syrian Christians. Disproportionately less public resources are mobilised from and to the Malabari Muslims. The population severely affected by this revenue system is the lower caste and lower class Hindus. Implications of these imbalances are far-reaching with a possibility of slow but steady immiserisation of the poor and marginalised, especially the Hindus — this may also be a reason for the BJP to come into force in Kerala.

Unless the Kerala government corrects these imbalances, the fiscal crisis will only exacerbate. There is a need to restructure the finances of the State and break away from the resource mobilisation strategy from liquor and lottery, which puts additional burden on the poor and marginalised group.
Instead of levying high tax on liquor, the government should implement licensing of liquor. In order to augment the tax revenue of the government of Kerala, he proposed the following corrective measures:
 The government should enhance the tax rates on property, both commercial and residential in a progressive manner. A progressive tax will not impact the lower-income segment if it impinges on those whose value exceeds a judiciously determined ceiling.
 Public resources should be raised from secular sources.
 Subsidies should be directed to those who are deserving and user charges should be levied in the field of social and community services.
 There should be a shift from the present pension system to a social system that provides social security to every individual without discrimination.

Kerala needs a complete overhaul of the system. Correcting the imbalance in both the revenue and expenditure front is imperative to solve the crisis. However, if this chronic fiscal situation continues, Kerala economy would be in a state of disorder.

CPPR Senior Research Associate Nissy Solomon delivered welcome and introductory remarks. K V Thomas, Senior Fellow at CPPR presented a memento as a token of appreciation to Dr Jose Sebastian.


Report prepared by Nissy Solomon (Senior Research Associate, CPPR) with inputs from Angela Cicily Joseph (Research Associate, CPPR)