Kerala Finance Minister K.N. Balagopal’s second Budget has driven home the grim reality of the state’s economy. No sooner had the Budget speech been delivered than the opposition was on its feet, protesting the unexpected fuel cess, among other steep tax hikes. And hopes of a rollback dissipated when Balagopal categorically ruled it out in his reply to the general discussion on the Budget this Wednesday.
While economists of all ideological persuasions roundly criticised the fuel cess of Rs 2 for its inflationary effect, tax hikes were also simultaneously imposed on every possible item outside the purview of the Goods and Services Tax (GST). For sure, Balagopal deserves the brickbats coming his way for the thoughtless imposition of the fuel cess (even as Rs 2,000 crore has been earmarked to deal with inflation in the very same Budget). Still, the bigger question is how Kerala’s finances ended up in this sorry state.
‘Artful dodger’ Isaac
One needs to go back to Pinarayi Vijayan’s first tenure in 2016—when Thomas Isaac was Kerala’s high-flying finance minister—to find the answer. A key player in the Centre’s GST rollout, Isaac’s comment on the eve of the GST adoption that it would boost Kerala’s revenue as a consumer state was widely circulated. Of course, Isaac’s contention had some basis to it, but almost six years into the GST’s adoption, Kerala’s revenues have plummeted, and the five-year GST compensation (extended by the Centre) ended last July.
Isaac is widely known as an economist-politician. Every Budget of his, including the ones presented from 2006 to 2011 under former Chief Minister V.S. Achuthanandan, was so attractively packaged that it would always win the plaudits of the press. After assuming charge as Kerala’s finance minister for the second time, in 2016, post the tenure of the Oommen Chandy government, Isaac came out with a white paper listing the failures of his predecessor K.M. Mani in tax collection and promised to turn things around.
Isaac’s 2016 Budget was a case of creating hype over things like fat tax, as a prelude to the more extravagant Budgets he would go on to present in his tenure.
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KIIFB: A white elephant
Isaac’s biggest brainchild is the Kerala Infrastructure Investment Fund Board (KIIFB), dubbed an off-budget special purpose vehicle to borrow funds for the state’s infrastructure projects: By diverting a source from the state’s own budgetary framework (motor vehicles tax) to create a corpus for the repayment of loans, and going on to raise funds through the issue of masala bonds (debt bonds issued to attract foreign capital in Indian currency) at the London Stock Exchange. Isaac insisted that Kerala could undergo an infrastructural overhaul through this arrangement, bypassing the state budget.
Kerala’s reputed economists and the Comptroller and Auditor General (CAG) had sounded warning bells on KIIFB, with the state itself extending a sovereign guarantee to this fund. However, even the Congress-led opposition was so taken in by Isaac’s idea that they cast a blind eye to paid programmes on local news channels on election eve. It was only in 2022, after Isaac’s tenure ended, that the Centre issued a notification adjusting the KIIFB’s off-budget borrowings under the state head, thereby bringing Kerala’s net borrowing ceiling down.
The acceptance of KIFFB in Kerala’s public sphere also emboldened Isaac to go for yet another off-budget vehicle— the Kerala Social Security Pension Limited (KSSPL) in 2018 to finance the state’s burgeoning social security pensions. The Centre’s notification on Kerala’s borrowings also took the KSSPL into account, thereby leaving Balagopal at his wits’ end.
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The ‘unkindest’ cut of all
Isaac’s biggest contribution to Kerala’s current financial crisis was his parting shot in adopting the 11th State Pay Revision Commission’s recommendation to revise the salaries and pensions of roughly one million government servants for sheer political expediency. This was adopted on the eve of the assembly polls in 2021 (effective retrospectively from 2019), as a sop to the ‘influencers’ in the Left Front’s collective bid to ensure a second term for Vijayan.
Now, unlike in the Centre, Kerala has been going for revisions of salaries and pensions of its employees every five years (at the cost of capital investments) for the past four decades, starting in the 1980s, when coalitions led by the Communist Party of India (Marxist) and Congress began to rule alternately. There’s also a hidden element here that escapes public scrutiny: Almost a third of the state government employees owe their allegiance to the Left and allegedly offer a share of their pay packets to the Left coffers. This ‘levy’ of its affiliates by the CPI(M) is one of the best-kept secrets of Kerala politics.
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The GIFT ‘bomb’
Perhaps there can be no better judge of Isaac’s five-year term as finance minister than his own government-aided premier research foundation, the Thiruvananthapuram-based Gulati Institute of Finance and Taxation (GIFT). A month before the scheduling of the 2023 state budget, the GIFT released a 32-page report (in ThePrint’s possession) on its website, which disappeared in no time as a damning indictment of Isaac’s lofty claims. The report states how Kerala’s growth in tax revenues from 2016-2021 stood at a paltry 2 per cent, compared to 6.3 per cent nationally.
The report also compares Kerala’s bloated revenue expenditure and dwindling capital expenditure for thee five years with other major states, rating it unfavourably. For someone who acted as a spokesperson for the GST regime, the state’s annual GST growth under Isaac was less than half the national average. The biggest shocker in the report, however, pertains to Kerala’s much-vaunted expenditure on the social sector, where it is placed 17th in a grouping of 19 major states, taking the wind out of the Left-Democratic Front (LDF)’s proclamations on catering to the most vulnerable.
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It is in this context that Balagopal needs to be judged less harshly and afforded an opportunity to turn things around. Faced with a liquidity crisis and the plateauing of the plan fund at 50 per cent, Balagopal has no elbow room to work with at present. However, despite the debt-to-Gross State Domestic Product (GSDP) ratio hovering close to 40 per cent, Kerala’s economy is resilient enough to weather this storm.
With its high per capita income, Kerala has been India’s most prominent consumer state for over two decades. All it needs is a bit of fiscal and budgetary prudence and effective tax collection. The reconstitution of its GST wing and belated purchase of the backend software is a good beginning. And one would rather have a bland Balagopal-reality check than Isaac’s speeches laced with poetry, leading Kerala up this garden path, any day.
The author is a Kerala-based journalist and columnist. He tweets @AnandKochukudy. Views are personal.
(Edited by Zoya Bhatti)