The Finance Minister of Kerala, Thomas Issac, will be presenting the budget for the financial year 2018–19 on February 2, 2017, a day after the presentation of the Union Budget. The timing of the budget is crucial, as the state’s economy is going through a tricky phase. Since many expectations surrounded the previous budget, now is the time to look back and analyse how much of those expectations were fulfilled in the course of a year.

The implementation of the Goods and Services Tax (GST) on July 1, 2017, was expected to turn into a saviour for the crisis-hit economy of Kerala. The tax revenue was predicted to increase by 20 per cent at Rs 53,411 crore compared to Rs 44,547 crore in 2016–17. However, GST collection did not pick up even at the all India level, and Kerala suffered a similar fate. At a time, when Kerala expected a 20 per cent increase in tax revenue, the expenditure of the government was projected to increase by 15 per cent. In keeping with the tag of a ‘welfare state’, Kerala introduced several welfare schemes in the previous budget, ranging from free internet to free medicines. Additionally, the government had to find space for the committed expenditure, viz. salaries, pensions and interest payments, from the receipts. Since the state was unable to achieve the 20 per cent growth in tax revenue, the high level of expenditure aggravated the economic crisis.

The state government has imposed restrictions on withdrawing funds from the treasury, due to the difficulties it faced in disbursing salaries and pensions. The Treasury Savings Bank (TSB), unique to Kerala, became a bane for the state, as the central government placed restrictions on borrowing from the market. The rationale behind the move was simple – a state that owns a TSB with a net worth of Rs 13,000 crore need not borrow from the market. Kerala was quick to act and convinced the centre that most of the funds in TSB were earmarked for projects to be undertaken by various state departments. Despite the argument that most of the funds parked with TSB belong to state departments, Kerala has an advantage in terms of access to funds with TSB. However, even owning a TSB is not helping the state government to fund its immediate needs, while it is pushed to borrow from the market to pay salaries and pensions. The situation shows the plight of Kerala’s economy.

Following an expenditure pattern that focuses on welfare schemes, salaries and pensions has adversely affected infrastructure development in the state. Due to the reputation of being hostile to businesses, Kerala has failed in attracting the much-needed private investment. The Kerala Infrastructure Investment Board (KIIFB) was given a facelift in the previous budget, as an alternative to private investment. KIIFB is a highly ambitious project by the government intended to meet all the investment needs of the state. But the success rate of KIIFB is still debated, as most of the projects routed through KIIFB are yet to take off. Fund crunch is cited as the major reason for the delay in executing the proposed projects. It shows that the government has not been successful in mobilising funds through KIIFB. The failure of KIIFB in garnering funds should be considered a positive signal for the fiscal health of the state. Even though it is being claimed that KIIFB is an out of the budget process, the government gives the guarantee to the loans raised by KIIFB. Hence, ultimately the liability will fall upon the government. If the loans are not repaid by KIIFB, the amount would be added to the debt of the state, which is around Rs 2 lakh crore.

Now, the government should seriously look into the areas where it can cut back expenditure. For instance, Kerala has the largest share (107) of Public Sector Undertakings (PSUs) in India. Though most of the PSUs stare at heavy losses, the government is spending crores of rupees every year to sustain them. The government is also providing guarantee to the loans taken by the PSUs. But the government spending over the years has not helped in turning the PSUs into efficient and profitable units. It clearly shows that it is time to let go the baggage of sustaining the loss-making PSUs. Even the central government is giving a serious thought on disinvestment, with disinvestment targets being set in the last three budgets. Disinvestment is also considered a major source of revenue for the central government. Time is ripe for Kerala to ponder this avenue, as it could greatly narrow down the gap between its receipts and expenditure.

The expenditure on salaries and pension has always been a worrisome factor for Kerala, as it consumes more than half of the state’s revenue receipts. None of the governments of the state has taken any measure to control the expenditure, whereas ample sum has been added to it. For instance, the number of government employees was 48,8691 in 2010–11, whereas it is 50,9282 in 2017–18, which means that around 2 per cent of Kerala’s population work as state government employees.

Kerala should now be ready to take an alternative path, lest the state be pushed into a severe financial crisis. The government should have the courage to take all possible measures to lift the economy out of the impending crisis, even if it faces opposition from different quarters. The state cannot merely sustain by borrowing, and if it needs to grow, it has to work towards bringing in private investments.

*Deepthi Mary Mathew is Research Associate at CPPR-Centre for Comparative Studies. Views expressed by the author is personal and does not represent that of CPPR

Deepthi Mary Mathew

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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 protected] or on Twitter @DeepthiMMathew

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