Kerala finance minister T.M. Thomas Isaac was one of the first economists to flay demonetization a year ago.
He was faced with the unenviable task of steering the state’s economy past the headwinds created by the scrapping of high-denomination notes and the introduction of the Goods and Services Act (GST).
The numerologically inclined can blame the minister’s insistence on having the 13th number official car for himself but the CPM leader is busy drawing up a Keynesian plan ahead of the budget.
Issac speaks to Onmanorama about Kerala's fiscal challenges a year after demonetization.
Excerpts:
• A year after the demonetization, how do you evaluate Kerala’s experience?
Kerala was affected in the same manner as the other states. The biggest setback was expected in the cooperative sector. We could resist that.
The small-scale sector has slowed down since demonetization. That sector was the worst-hit.
That slowdown is persisting, maybe because of the introduction of the Goods and Services Tax (GST). The organized sectors could opt for alternatives to stand their ground but the small-scale sector could not.
Many of them have ground to a halt for the past two months. They were not even able to pay wages. Nor could they procure raw materials.
• What do you propose to do to overcome the crisis caused by the demonetization when you present the budget?
Things were supposed to look up after a point. The losses caused by the decision were not minor. India as a whole has suffered production loss of up to Rs 2 lakh crore.
The GST added to the woes of the industries. The GST has also affected the unorganized sector.
They were earlier exempted from excise taxes. They only had to pay value-added tax (VAT). Now many sectors have to pay much more than VAT. Their competitiveness has been significantly reduced.
Kerala’s small-scale sectors, including small-scale rubber sector and plywood sector, has suffered setbacks. How do we overcome this? We will need to overhaul the GST. We have been discussing certain measures for that.
Secondly, we can increase government spending to overcome the slowdown. The union government has similar plans.
The government plans to invest Rs 10 lakh crore, including big-ticket projects, in the backdrop of the slowdown.
Those are correct measures but the center’s plan will take a long time to affect the economy because most of them are large-scale projects.
By the time the government prepares detailed project reports and pumps in the money, it will take at least two years. So that is an eyewash.
Had they doubled the wages under the employment guarantee scheme, the money would have reached the laborers. But they opted for big projects.
The state governments are now allowed to take loans of 3 percent of the GDP. If the limit is raised to 3.5 percent, expenditure will increase and the slowdown will be addressed.
• What kind of interference can we expect from the state budget?
The previous two budgets had focused on increased expenditure in the backdrop of reduced remittance from the Gulf countries.
Since Kerala does not have the permission to borrow more, we are looking at non-budgetary expenditures. What we had promised, we have just started to implement.
Kerala will see massive public investment in projects next year. Most of it would be in the construction sector.
I think up to Rs 25,000 crore will be spent in Kerala. That is a kind of resistance.
• When will the budget be presented?
The budget will be presented as soon as the party’s (CPM's) district conventions are completed.
We need only a week to complete the process. The assembly will have a recess of three weeks after the governor’s address and subsequent debates.
The subject committees can vet the budget during that period. The house will be convened in March to pass the full budget.
• Was the GST beneficial to the state? There are persisting concerns.
The people in Kerala will not have much to complain after the latest changes. Businesses with turnover of up to Rs 1.5 crore will be included in the composite category.
That means 80 per cent of the registered taxpayers in Kerala. They only have to file returns every three months. Detailed figures are not needed.
They only have to pay 2 or 3 per cent of their turnover. We had raised this earlier but it was rejected.
We have to allow input credit for everything in the GST. Now everyone agrees that the GST can be implemented in its pure form even in a complex economy like India.
The problems will be sorted with that. I think we can reduce the rates of many items after that.
• Has the GST benefited Kerala?
It should have, in principle. Our tax revenue should have increased significantly. But it has not, even after three months.
We can collect about Rs 450 crore as tax directly from within the state. But we are yet to get our share from outside the state.
Most of the things we buy here are from outside the state. Whatever the manufacturers have paid in the other states are supposed to come to us.
The Rs 450 crore excludes that share. We received Rs 450 crore in the first month, surprisingly.
It increased to Rs 700 crore in the second month and Rs 800 crore in the third month. It should have been Rs 1,000 crore as per my calculation.
That’s what we had expected. We do not have any mechanism to monitor the tax flow. We do not know whether taxes have gone up or down because the network is not functioning.
We can do little more than collecting whatever we can. When the system improves, our revenue will increase.
• Will the GST Council discuss a change in the tax difference for A/C and non-A/C sections in restaurants?
Kerala has demanded a 5 per cent tax rate without differentiating between A/C and non-A/C that can be shown in the bill and collected from the taxpayer. I expect that our demand would be met.
• How do you view a demand to bring the real estate sector within the GST?
We cannot allow that. That is the only sector left for the state. The state is collecting tax from the sector. We do not want to share half of it with the center.