Explained | Is Centre squeezing Kerala dry as finance minister Balagopal claims?

This might seem quite unusual for a politician. Kerala's finance minister K N Balagopal has openly declared that the State is in a deep fiscal crisis.

But do not mistake this as an admission of failure. Far from it. This, on the contrary, is a self-styled underdog's political war cry against the BJP-ruled Centre. Balagopal wants the LDF government to be seen as the victim of the BJP's authoritarian tendencies. In the hands of Balagopal, Kerala's fiscal wretchedness is a club to whack the Centre with.

The finance minister said that the Centre, for no sound reason than to strike at the foundations of federalism, has deprived Kerala of over Rs 40,000 crore this fiscal. This Centre-induced revenue crunch, he said, was the root cause of Kerala's fiscal woes.

Modi's three sins

Balagopal cites three ways in which the Narendra Modi-led government had squeezed Kerala dry. One, the Centre's revenue deficit grant had fallen by Rs 6,716 crore this fiscal; in 2023-24, the fall would be steeper, Rs 8,424 crore.

Two, the open market borrowing (OMB) limit of Kerala (3.5% of the GSDP) has been reduced by nearly Rs 25,000 crore by considering as state borrowing the money parked in the state's public debt and the debts incurred by state-run autonomous bodies like Kerala Infrastructure Investment Fund Board (KIIFB) and Kerala Social Security Pension Limited (KSSPL).

Three, a refusal to extend GST compensation beyond June 22 will rob Kerala of over Rs 9,000 crore this fiscal.

Together, if Balagopal's logic is taken at face value, the Centre's high-handedness would cost Kerala a whopping Rs 40,000 crore (Rs 6,716 + Rs 25,000 + Rs 9,000).

It is high time Balagopal's arguments are put to test.

Rope or Snake?

The fall in the revenue deficit grant (RDG) perhaps is the most convenient argument. On the face of it, it looks convincing.

From Rs 19,891 crore in 2021-22 to Rs 13,174 crore in 2022-23, there is indeed a fall of Rs 6167 crore. In 2023-24, the grant will drop to Rs 4749, seemingly a massive fall of Rs 8,425 crore from the previous fiscal.

Truth is, the revenue deficit grant is a special assistance granted by the 15th Finance Commission for states with high deficits. Not an entitlement, but a favour. Not all states are given this special assistance. Gujarat and Uttar Pradesh, for instance.

Kerala is defined not just by its low infant mortality rates but also by its shockingly high deficits. The average fiscal deficit for Indian states is 2.5 per cent. In 2021-22, Kerala's fiscal deficit was 4.17 per cent, the worst even among the five most indebted states in the country.

It was this serious indebtedness that prompted the 15th Finance Commission to grant Kerala the second highest RDG of Rs 37,814 crore; West Bengal got Rs 40,115 crore. This amount of Rs 37,814 crore will be granted in three tranches spread over three fiscals; Rs 19,891 crore (2021-22), Rs 13,174 crore (2022-23) and Rs 4749 crore (2023-24).

So what is in reality a life-saving rope extended to Kerala by the 15th Finance Commission, Balagopal has projected as a noose thrown around his neck.

Spare KIIFB and spoil Kerala

The contraction of Kerala's open market borrowings (OMB) is a complicated issue. There is a running dispute on how to interpret the borrowings of state agencies like KIIFB and KSSPL.

Kerala says KIIFB and KSSPL have their own means to pay back their debts and, therefore, their liabilities are only contingent or, in other words, would fall on the government only in the unlikely event of these entities going bankrupt.

However, the Centre, as well as the Comptroller and Auditor General, argues that such off-budget borrowings were only adding to the debt burden of Kerala and so has to be curtailed.

Reason why the Union Ministry of Finance has reduced Rs 14,312.80 crore, an amount both these entities had borrowed till now, from Kerala's OMB. This, however, would be reduced not in one go, but in four equal instalments of Rs 3,578.20 crore from 2022-23 to 2026-27.

What Kerala sees as ruthless and unnecessary imposition of fiscal discipline could seem rational from the Centre's point of view. An RBI-supervised study in the middle of 2022 had said that an 'interest payment to revenue receipts' (IP-RR) ratio of more than 10 indicated severe debt stress.

Kerala's IP-RR ratio, in 2020-21, was 18.8 per cent.

Public embarrassment

Branding the funds parked in Kerala's public account as OMB has also enraged the minister. But to be fair to the Centre, it had warned the LDF government in 2018 itself of the dangers of the seemingly shrewd but reckless use of the Public Account to meet the state's expenditure needs.

The Public Account - which includes small savings, Provident Funds, reserve funds, deposits and advances, and remittances kept in the treasury - had swelled under T M Thomas Isaac to Rs 13,000 crore in 2017 from an average of Rs 5500 crore during the previous five years. After that, except in 2019-20, it never went below Rs 10,000 crore.

The Public Account offered a safe, or so it seemed, way to park money that could not be spent during a fiscal year.

The expenditure for a financial year can be incurred only through legislative sanction, by presenting Demands for Grants and also by tabling an Appropriation Bill for drawing allotted sums from the Consolidated Fund.

If the funds cannot be appropriated during a financial year, they have to be surrendered. "To avoid this surrender, the money is withdrawn from the Consolidated Fund by the concerned departments and put in the Treasury Savings Bank (TSB) Account of a department or institution opened in the name of the authorised official. In most cases, funds were transferred even before project plans were finalised," a top official in the finance department said.

The TSB is unique to Kerala. Other states do not have such a mechanism that functions as the government's own bank.

Isaac had even increased interest rates to incentivise employees to park their salaries in the treasury.

All of this caused an accumulation of funds in the treasury, which the government conveniently dipped into in times of need.

But the Centre saw through the game and recorded the growing fund heap in the treasury this fiscal as money borrowed by the state. The money in Kerala's Public Account in 2022-23 (Rs 11,230 crore) was slashed from Kerala's OMB limit.

So, even if Balagopal's argument is accepted, the total reduction from Kerala's OMB limit was not Rs 25,000 crore as claimed but Rs 14,808.20 crore (Rs 3,578.20 crore + Rs 11,230 crore).

Compensation dilemma

This leaves us with Balagopal's outrage about the Centre's decision to stick to the original plan of ending GST compensation in July 2022.

Here, Balagopal has a case as other states, including BJP ones, too have asked for an extension. But the Centre, too, is struggling.

It is officially estimated that the shortfall in GST collections till June 2022 of all states put together is about Rs 7.10 lakh crore. The centre makes up for the shortfall by collecting a GST compensation cess imposed on certain notified goods, especially sin goods like cigarettes and pan masala and motor vehicles, and passing it on to the states.

But the GST cess collected till June 2022 is only Rs 2.25 lakh crore.

Incomplete homework

Economists like K P Kannan, former CDS director, said that the government should first do its homework before pestering the Centre for an extension.

"We are one of the high consumption states. There is not a house without a television or a fridge. The consumption of taxable commodities in Kerala is high and still such exceptional consumption is not reflected in our tax collection. In fact, our tax to income ratio is falling," Kannan said. "What's more, less than 25 per cent of gold consumed in Kerala is taxed. There is so much for the government to do," he said.

A recent RBI-assisted study says that Kerala's own tax revenue, in contrast to even a poor performer like Haryana, has been showing a decline over the years. This, according to experts, is a sign of administrative inefficiency.

Balagopal would do well to set this right first.