Crippled by massive debts, low revenues, spiralling unemployment, the exodus of youth to the West, uncertainty on the remittance front and systemic corruption, Kerala’s economy is heading towards a perfect storm. Even the leftists who once played up Kerala model development as their answer to the developmental problems of India have lost confidence in it.
Recently, Kerala Finance Minister K N Balagopal admitted that the State is reeling under an unprecedented financial crisis, and it is unwise to bank on remittance alone. A couple of months ago, Chief Minister Pinarayi Vijayan admitted that Kerala’s infrastructure is below par and a massive effort is needed to upgrade it to the standards of neighbouring States. But the LDF Government has no concrete solutions. Instead of taking corrective steps, the State Government is trying to pass the buck by blaming the centre’s policies.
Extreme political polarisations between the CPM-led LDF and Congress-led UDF are one of the primary reasons for setting wrong priorities, as projects are never considered on their merit. Political considerations drive governance, not merit. The lock, stock, and barrel must be changed to set priorities correctly. But, it can happen only at the end of a crisis
The reason for Kerala’s financial squeeze is fiscal mismanagement and wrong priorities. The State’s revenues are insufficient to meet the Government’s extravagant expenditure. So, the Government resorts to borrowing. On the below potential tax collection, noted economist Dr Mary George points out, “while Kerala ranks first in India as the consumer State, it ranks seventh in indirect tax collection. This shows the magnitude and rank inefficiency of tax collection.” She adds that the result is huge outstanding loans of the State have become unsustainable.
Unsustainable Debt
According to the Comptroller and Auditor General (CAG), the overall debt of Kerala (including off-budget borrowings) was Rs 3,24,855 crores in 2020-21 with a Debt-GSDP ratio of 39.87. That is unsustainable by all norms. The preliminary accounts for the year 2021-22, prepared by the CAG, say Kerala’s total Revenue deficit is Rs 26, 582 crores.
As the State Government gropes in the dark to find ways to increase Revenue, it resorts to unsustainable borrowing violating the limits set by Kerala Financial Regulation Act (KFR). To circumvent the mandatory limits on lending, the State Government is accused of using the facade of institutions like the KIIFB. However, the CAG caught this red-handed, found under-reporting debt and asked the Government to include specific out-of-budget borrowings in the budget. That infuriated the left.
The finance minister rues that the centre reducing borrowing limits and discontinuing GST compensation have landed the Kerala economy in dire straits. However, his weak and vacuous arguments have few takers. The State’s failure to collect taxes, a lethargic bureaucracy, failed agricultural and manufacturing sectors, ever-increasing expenditure on salary and pension, and fiscal profligacy are widely seen as the real reasons for the economic squeeze.
Tax arrears
When the State finance minister presented the budget for 2022-23 in the State Assembly in March 2022, the opposition pointed out that the actual increase in revenue collection after GST implementation was 10 per cent against a targeted 30 per cent. During the discussions on the budget in the State Assembly, it was pointed out that there is a fall to the tune of Rs 30,000 crore in tax collection compared to the budget estimates in the previous year.
The latest media reports say that the State Government has not issued data on tax collection arrears since 2019. According to the media, the tax overdue could be as high as Rs 40,000 crore. Despite the looming crisis, there needs to speak about collecting the dues.
Stay orders on tax collection, the superficial attitude of the bureaucracy and widespread corruption are some reasons for the shortcomings in tax collection. While corruption is ubiquitous in Kerala, it is not tangible, which is why many transparency surveys fail to find it.
There is an ecosystem for corruption around Government offices here involving autorickshaw drivers, neighbourhood shops, and agents who accept bribes for the bureaucrats and take a share. Such ingenious systems have institutionalised graft and made it invisible.
Agriculture sector
Kerala’s agriculture sector is in shambles. The violent anti-mechanisation and anti-crop diversification agitations by CPI(M)’s worker’s union, the Kerala State Karzhaka Thozhilali Union (KSKTU), frightened farmers away from fields. Food grain cultivation was the first to suffer. Cash crop farmers who once made a fortune by cultivating rubber and spices are now struggling and selling off their property.
There is a severe shortage of agricultural labourers, and farmers depend on migrant workers. Despite the claims of technological advances in the State, the productivity of crops here is less than the national average. The plight of the agriculture sector is evident in the Government’s statistics.
According to the Directorate of Economics and Statistics data, the 11th and 12th five-year plan periods witnessed negative growth in agriculture and allied sectors. The share of agriculture and allied sectors in the total GSDP declined from 14.38 in 2011-12 to 10.38 in 2015-16. It is widely quoted that agriculture and allied sectors contribute just 9.38 per cent of GSDP.
Industrial sector
The Government claims that the share of the manufacturing sector to GSDP improved to 12.5 in 2019-20 from 9.8 in 2014-15. However, it is far less than the national average of 16.92. When the Central Government plans to raise the contribution of manufacturing to 25 per cent of the GDP, Kerala has yet to make plans to take advantage of it.
While Kerala imported goods worth Rs 1.5 lakh crore from other States in the financial year 2022, its export was worth just Rs fifty-five thousand crore. If the revenues from Kochi Oil Refinery and other Central PSUs are deducted from Kerala’s export revenue, the situation would be pathetic.
While India received around $ 142 billion in foreign investments from 2019 to 2022 March, Kerala’s share was just $ 0,6 billion. Despite the claim that the State has a vast repository of educated youth, the State doesn’t have industrial hubs like the automobile industrial hub in Tamil Nadu or the software industry in Bangalore. Kerala doesn’t attract new investors.
When Foxconn recently scouted for a location to manufacture Apple phones, they initially settled on Tamil Nadu after considering Kerala. Meanwhile, the unemployment rate among youth aged 15-29 was a whopping 35.4 per cent, per economic review 20-21.
Poor infrastructure
While road and rail development are imperatives for economic development, Kerala lacks both. Dedicating 51 renovated roads in the State on March 31, 2022, Pinarayi Vijayan said, “If we fail to change, we will end up a laggard.” Kerala is already one. The delay in implementing projects is unbelievable and causes staggering cost escalation. It took over 30 years to complete 12-kilometre-long Kollam and seven-kilometre Alappuzha by-pass roads inaugurated in 2019. Such are many examples.
While remittances shored up the economy till recently, it has started dwindling. The present migration to Europe, the US and Australia are unlikely to sustain remittance as the migrants eventually get citizenship and spend money there, unlike in the Gulf nations, which rarely grant citizenship, forcing the migrants to invest at home.
Extreme political polarisations between the CPM-led LDF and Congress-led UDF are one of the primary reasons for setting wrong priorities, as projects are never considered on their merit. Political considerations drive governance, not merit. The lock, stock, and barrel must be changed to set priorities correctly. But, it can happen only at the end of a crisis.
