Bengaluru: The stark reality about Kerala is that there are no funds left in the state treasury for capital expenditures like construction of roads or bridges, Kerala governor P. Sathasivam said, while addressing the maiden session of the 14th state assembly on 24 June.

In this context, the expectations are unusually high from economist-turned-politician and Kerala finance minister Thomas Issac, who will present the first budget of the Left Democratic Front, which won the May assembly election in Kerala, on Friday.

Ahead of the budget, the minister tabled before the house a white paper on the state economy last week, which says the finances of Kerala are in dire straits. A close look at the white paper shows what went wrong in the economy of Kerala, a state that is otherwise known for high levels of prosperity in many ways.

Slow pace of revenue growth

Like any other state, Kerala’s revenue comes from three major streams—tax revenue, non-tax revenue and central funds. The white paper notes that the pace of growth of the state’s revenue has been falling—the five-year average growth rate of total state revenues was 17.2% in 2006-11, compared with 14.20% in 2011-16, as the above chart shows.

Interestingly, this is despite the significantly higher Central funding the state received in the last few years because of the devolution of funds for states as per the 14th Finance Commission. Receipts from the Centre to the state grew by 40% in 2015-16 when compared to the previous year, as per the finance department.

The reason why the total revenue receipts are not forging ahead at a relatively greater pace is because of the sluggish growth of the state’s own revenue, as per the white paper. The share of the state’s own tax revenue in total revenue receipts fell from 64% in 2006 to 58% in 2016 after having peaked to an all-time high of 70% in 2011, it said.

Slow growth of commercial taxes receipts

High levels of tax collection are actually what sustains the coffers of Kerala, as per the finance department. They constitute the lion’s share of the state’s own revenue mobilisation. However, after steadily increasing between 2008-09 and 2012-13 (in 2012-13, almost 51% of the state’s total revenue was from commercial taxes), it has been on a declining curve, so much so that the 17.75% growth in this head in 2006-11 period has dropped to 14.26% in 2011-16.

Huge increase in non-plan expenditure

Despite the inability to generate high levels of revenue, Kerala seems to be spending way out of its pocket. The white paper points out the high levels of non-plan expenditure as an indicator of this trend. Between 2013 and 2016, the non-plan expenditure of the state, after leaving out salaries, interest and pension—which are committed liabilities—was at the highest levels in the last decade, it said.

“Evidently one of the factors that aggravated the financial crisis during the tenure of the previous Government has been the failure to control avoidable Non Plan Revenue Expenditure," said the paper.

Cash reserves in the treasury

Kerala chief minister Pinarayi Vijayan admitted in an earlier interview to Mint that the state is fiscally “weak".

Weak would be too modest a descriptor, if cash reserves in the treasury is any indicator of a state’s fiscal health.

Between 2011 and 2015, the treasury’s closing balance has nosedived from ₹ 3,514.22 crore to ₹ 142.65 crore, the last decade’s lowest level. The treasury balance has been recorded as ₹ 1,643.99 crore in 2016, but this, the white paper argues, is a result of payments of approximately ₹ 1,800 crore blocked at the treasury and the government levels. Issac has argued in the ongoing assembly that former finance minister K.M. Mani showed a positive cash balance through this way, while in reality the state was maintaining a negative balance in 2016. Mani has denied this accusation.

An almost empty treasury is worrying for the new government also because the state has about ₹ 10,000 crore immediate liabilities to meet in the short term, said the white paper.

Missing the bus on fiscal goals

As per the fiscal responsibility frameworks implemented both at the state and the Central levels, Kerala was supposed to manage its revenue deficit (RD) and fiscal deficit (FD) to gross state domestic product (GSDP) at 0% and 3% respectively, said the white paper.

While RD is the difference between the net income generated, and the net income projected, FD is the difference between a government’s expenditure and revenue, excluding its borrowings.

Successive governments in Kerala were trying to achieve these fiscal goals but after 2011 such efforts seem to have lost track, said K.N. Harilal, former planning board member and economics professor at the Center for Development Studies.

This is the most worrying aspect about the economy right now, he said. Both FD and RD had shrunk to their lowest levels in this millennium in 2011, but are expanding after that, Harilal said.

The particularly low numbers of 2016 are because the government was really short of cash and could not finance any expenditure, he said. So, it should be seen as the enormity of the problem rather than as no sign of relief, said Harilal.

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