Keralas Fiscal Crisis

Fiscal constraints had existed even at the time of the formation of Kerala in the 1950s. One is
filled with admiration at how much the EMS Namboodiripad and Achutha Menon managed to
achieve with respect to public provisioning in the health and education sectors on so slender a
resource base.
Both of them had followed sentimentality when it came to governance. But the succeeding
politicians in Kerala show no such awareness, which explains why the State finds itself in the
present predicament. Governments claiming allegiance to ideologies of the left or the right have
come and gone leaving only a mounting debt for future generations to repay. Kerala has been
categorised as debt stressed by the Centre.
The present scenario of Kerala
The real growth expectations of 2013-14 is 8.58% of GSDP.
There was a considerable decrease in the agricultural sector loan advances from Rs 45.055cr to
43,325cr.
The Industrial sector showed a small increase from 29,668cr to 31,668
63% of the state GDP is contributed by the service sector.
The NRI remittances had increase of 14, 720Cr in last 6 months.
The investment plans of Kerala in Infrastructure include

the Emerging Kerala (vision of providing 3000 startups by 2020)

Kerala Technology Innovation Zone in Kinfra Park in Ernakulam dt.

Entrepreneurship Policy: 20% attendance allowance and 5% grace marks in Kerala

University and Cusat for student entrepreneurs.

LNG terminal in Puthuvyppe in ekm dt. This will help to boost shipping industry and
provide many jobs etc.

Financial Liquidity Crisis

Financial liquidity has been a persistent problem for Kerala. This is because of the
various welfare measures and heavy expenditure incurred by the State in maintaining
high standards in health and education sectors without taking the cash outflow into
consideration. The quinquennial pay revision, biannual revision of dearness
allowance and dearness relief as a result of persistent inflation, growing interest
payments etc. leads the State away from achieving any consistent level of fiscal
consolidation. The fact that the State devolves amount equal to 25% of its Annual
Plan size to Local Governments and the reckoning of the devolution as revenue
expenditure deteriorates the situation even further. Another factor is the borrowing
ceiling fixed @3% of GSDP by the 13th Finance Commission which is insufficient
for a state like Kerala which has always had a higher GSDP growth rate than the
national GDP growth rate.

FISCAL PERFORMANCE IN 2012-13

The fiscal targets for 2012-13 according to the Fiscal Responsibility (Amendment)
Act, 2011 , the projected Revenue deficit, Fiscal Deficit and outstanding debt as
percent of GSDP were 0.9%, 3.5% and 31.7% respectively. As per final figures, the
first two were, disappointingly, 2.68% and 4.29% of GSDP. Debt as percentage of
GSDP alone was well within the target at 29.64%.
Plan expenditure on revenue account has increased substantially owing to increase in
the Plan size for 2012-13 and Non Plan Revenue expenditure on interest, pension and
salaries have led to the States inability to stick to targeted revenue deficit.
Borrowings and other liabilities constituted 26.07% of total receipts (out of the total
receipts of Rs.59822.76 crore, Rs.15597.04 crore is through borrowings and other
liabilities during 2012-13). Higher levels of Revenue Deficit and Capital spending
were the reason for Fiscal deficit eluding the 13th F.C. target. During 2011-12,
borrowings and other liabilities was only 24.28 percent of total receipts.
Revenue Receipts
The revenue receipt is estimated to grow at 17.97 percent over RE 2013-14. The
revenue receipts have been registering consistent growth for the last few years. This
indicates well managed tax administration of the State. Within the SOTR, the major
item of sales tax/VAT is projected to grow at 19.69% over R.E.2013-14. The other
major items are stamps and registration, excise and motor vehicle tax which are
projected to grow at 17.68%, 17.98% and 23.29% respectively over R.E.2013-14.
Since the Union Budget is yet be finalized, share of central taxes is nominally taken to
grow at 15%.
Various problems faced by the Kerala Economy:
Fluctuating tax buoyancy.
There has been a stagnancy in the tax growth. This can be made more effective by the
introduction of e-filing, e-payment and online declaration of statutory forms in Taxes
Department, tax buoyancy is expected to increase along with the modernization of tax
collecting departments, which is in progress.
The service sector which is the fastest growing sector has a non-taxable nature which
is a concern.

Rising debt to GSDP ratio.

Excessive dependence on remittances.

The agencies responsible for public services are understaffed, and to the extent they
provide producer services, this lowers output. When output is negatively affected it
lowers public revenues as most taxes are levied ad valorem.

Growing Inequality in the Kerala society

Four Inequality dimensions seen in the state:

Social sector induced growth

Economic reforms

Foreign remittances

Ad-hocism.
The commercialisation of education and health sectors, once the bedrock of the Kerala
model of development, had completely marginalised the historically disadvantaged
groups like Scheduled Castes, Scheduled Tribes, and the fisher folk. The difference in the
expenditure on education between the rural low-income groups and high income groups
was disquieting.
Housing glut adds to further emphasise the point of growing inequality. More than 10
per cent of houses were vacant and 66.5 per cent of houses in Kerala had three or more
rooms.

Conclusion
Vested interests, competitive populism, pet projects and sheer incompetence are factors
that have contributed to Keralas perennial fiscal crisis. In a democracy it is the duty of
those in public life to not only explain this to their constituencies but to do whatever it
takes to ensure the robustness of the public finances. With the ongoing fiscal crisis
Keralas political class has failed this test.