Balagopal apes Isaac, uses fancy figures to mask Kerala's deep fiscal crisis

Finance Minister K N Balagopal's first Budget is like Oscar Wilde's Dorian Gray, deceptively good looking. Charmed by the COVID-19 action plan and generous welfare transfers, some already consider Balagopal's maiden speech a beautiful ode to compassion in these hard times.

If Dorion Gray's rotten nature was hidden behind the purple veil of his secret portrait, the horrible state of Balagopal's finances can be found in the figures secreted away in the back pages of his Budget documents. Balagopal, like his predecessor T M Thomas Isaac, has played a huge deception game on the public.

A cursory look at Balagopal's Budget numbers suggest sturdy finances, it can even question the existence of the pandemic.

The estimated revenue deficit is 1.93 percent of the Gross State Domestic Product (GSDP), which is considerably better than pre-COVID pre-flood levels. During 2018-19, when a pandemic of COVID-19 proportions was not even in the minds of the darkest pessimist, the revenue deficit was 2.21 percent. Two fiscals ago in 2016-17, when a deluge was thought possible only in films, the deficit was 2.51 percent.

Those were also times when there was a free flow of revenues into the government's coffers. But this fiscal, when there would be crazy levels of borrowing and virtually no returns, Balagopal has estimated a sub-two percent revenue deficit.

This would look like magic till Balagopal's Budget figures are closely probed.

Incredible Hulk Kerala

Let's begin with the least problematic of the numbers. Kerala's GSDP growth rate in 2021-22. Balagopal has estimated it to be 6.60 percent. But just a week ago, the Governor said it was improbable.

Here is what Governor Arif Muhammad Khan said in his Address to the Assembly on May 28. “It is estimated that our Gross State Domestic Product (GSDP) would decline by about 3.82 percent in 2020-21. We expected a sharp recovery in the economic growth to 6.60 per cent in 2021-22. But the second wave of the COVID-19 pandemic can be an impediment to this expectation.”

Balagopal does not think so. He insists that Kerala's GSDP will grow, as predicted by Isaac in his last budget, by 6.60 percent in 2021-22. Last fiscal, during the first year of the pandemic, it was not as if growth fell by 3.82 percent from 8.15 percent in 2019-20. It first fell to zero and then contracted by 3.82 percent; it was negative growth.

Therefore, to achieve 6.60 percent growth, the economy that faces greater supply and demand constraints than last year has to grow at over 10 percent.

Guv's caution, Balagopal's rashness

Balagopal's revenue expectations seem like the estimate of an impostor who has no idea of how the economy works.

Even the Governor doubted Isaac's unbridled January optimism. Khan said in his address: “Though we expected a sharp rise of 37.87 percent growth in revenue receipts in 2021-22, the consequences of lockdown necessitated by a surge in COVID-19 cases, is likely to constrain this. Coupled with the additional expenditure commitments, the State finances are likely to witness higher revenue deficit as well as fiscal deficit.”

Spurred perhaps by the feeling that the pandemic was about to go away, Isaac had estimated an improbable growth in revenue receipts; from Rs 93115.11 crore in 2020-21 to Rs 128,375.88 crore in 2021-22, a 37.87 percent growth.

The Governor, aware of the havoc unleashed by COVID, called for cautious optimism. Balagopal, instead, demonstrated an optimism that went beyond unrealistic to the realm of the weird. He has now estimated a whopping 40.7 percent growth in revenue receipts this fiscal.

Never before, not even when the economy was in the pink of health, had revenue receipts grown over 26 percent.

Tax, non-tax haven

And within the revenue receipts, Balagopal estimates tax revenues to grow by 58.6 percent. This could probably even be a printing error as in the last seven fiscals state's own tax revenue had never gone above 10 percent and never ever has annual growth in collections crossed 26 percent.

Equally far-fetched is Balagopal's estimate of non-tax revenue growth. He says it will grow by 57.16 percent, from Rs 9121.27 crore to 14335.79 crore. Annual non-tax revenue growth is conventionally either stagnant or appreciates only marginally (less than 5 percent).

Kerala's big fat debt

So to keep deficits low and create the illusion of fiscal discipline, Balagopal, like his predecessor Isaac, has gassed up revenue figures to improbably fat sizes. On paper, this presents an impression of fiscal calm. But the impossibly fat balloon could burst any moment.

Going by Isaac's debt principle, it should have already burst. The former finance minister had repeatedly said that debts were sustainable as long as the state's growth rate is higher than the average interest rate. So it was fine till March 2020, when growth was still higher than average interest rate.

After this, there was no growth but only contraction. But the average interest rate still hovered around 8 percent. Post COVID, Kerala's debt has become unsustainable. Even Balagopal's bloated growth estimate of 6.60 percent for 2021-22 is not enough to compensate for the average interest rate of over 7 percent.

Yet, Balagopal like his senior comrade has made sure that Kerala's budget figures do not reflect its unsustainable debt.

Scare for KIIFB

If there is one logical reason why Isaac and now Balagopal have resorted to illogical Budget numbers, it is Kerala Infrastructure Investment Fund Board (KIIFB). Healthy deficit indicators alone can prompt banks and lending agencies to continue backing KIIFB.

But if the lenders look closely, the KIIB experiment could be doomed.