K.P. Kannan
The good news about Kerala economy is that there has been a full-scale recovery in economic growth. But non-specialists are likely to be surprised by this fantastic growth rate of 12.01% in real terms between 2020-21 and 2021-22. If one factors that this comes after a negative growth of 8.43% in the previous year, the real growth is only 3.58% for two years i.e. an annual average growth of 1.8% for the past two years.
However, such a growth for 2022-03 is unlikely going by the quick estimates that the Finance Minister cited. At ₹10.18 lakh, it will be a 11.3% increase in nominal terms and if the average inflation continues around 6 to 7%, it will be a real growth of 4 to 5%.
The pertinent question, however, is whether the State government’s own revenue has also registered a similar growth to measure its collection efficiency. Available data show a remarkable recovery here to the tune of 24% in nominal terms and 17 to 18% in real terms. That gives a collection rate of ₹8.4 for every 100 rupee of State income. This is certainly higher than 7.6 in 2021-22 and 6.9 in 2020-21 that witnessed a high water mark of the COVID-19 pandemic. But this ratio is only a restoration of the pre-COVID average for the second decade of this century. There is a long way to go to reach a historically feasible average of 12.4 that was in vogue during 1975-86.
What it means in plain language is that only two-thirds of the collectable revenue is being collected. With an expected State income of ₹10.18 lakh for the year ending March 31, 2023 the loss will be a whopping ₹40,000 crore. This is the larger challenge before any Finance Minister when it comes to tax collection efficiency.
This is at the root of Kerala’s persistent crisis in public finance. For the past 38 years since 1984, Kerala has been managing its public finance with a revenue deficit year after year. This is not the story of our two neighbours as well as all-States combined. That means the government could not conduct its day-to-day business without resorting to borrowing.
Since borrowing involves a cost in the form of interest payments, Kerala has been resorting to borrowing in order to pay its interest over borrowed funds. For the decade ending 2019-20, interest payments worked out to 90% of the revenue deficit on an annual average basis. This also works out to 58% of the annual borrowings.
In some years, since revenue deficit exceeded interest payments, even other expenses were also had to be met with borrowed money. Thus, the available balance was a mere 42% of the borrowings for capital expenditure. If a government had to borrow every year to meet its revenue deficit, is it not a case of debt trap?
The often heard argument of the government for the persistent revenue deficit is that Kerala government incurs a higher rate of social sector expenditure (meaning welfare enhancing expenses) than other States. This is an old story. As reported by the Reserve Bank of India in its latest series of State Finances for 2022-23, the average annual expenditure for nine years ending March 31, 2020 the social sector expenditure as a per cent of State income (GSDP) was 5.6% against 6.9% for all States and Union Territories combined. For our two neighbours it was 5.8% for Karnataka and 5.5% for Tamil Nadu that are also well-known for its welfare- enhancing public expenditure.
In my view, there is what may be called a Kerala conundrum. That is, a State with an enviable record of persistently high human development with an unenviable record of public finance management. That calls for some debate, to say the least.
( The author is a development economist)