Kerala Budget Analysis | Was it necessary to impose cess on fuel? Will it stoke recession?

What little Nirmala Sitharaman seems to have given by way of income tax relief, K N Balagopal is all set to take away from his people by imposing the heaviest additional tax and non-tax burden ever inflicted by a Kerala finance minister.

The additional resource mobilisation Balagopal has announced in his 2023-24 Budget is Rs 2955 crore, the highest ever. Not even in the pre-GST era, when finance ministers had the power to tweak tax rates on goods, had anyone thought of amassing as much additional money from the public.

In 2014, when K M Mani increased the building tax for the first time in 17 years, imposed huge taxes on vehicles and increased VAT on a wide range of commodities, the LDF had branded him insensitive and cruel. Then, Mani's additional resource mobilisation was Rs 1556 crore, just half of what Balagopal announced on Friday.

'Cess'pool trap
Balagopal would extract the biggest chunk of this additional burden, over 25 per cent or Rs 750 crore, by resorting to a highly inflationary move: increasing the price of a litre of both petrol and diesel by Rs 2.

This is in addition to the one per cent 'petrol cess' consumers already pay for a litre of fuel in Kerala; in today's prices, the existing state cess on petrol is Rs 1.08 and that on diesel is Rs 0.97.

Balagopal has called his new levy on fuel a "social security cess", which will go to a 'Social Security Seed Fund' that will be used to pay social security pensions.

Besides the cess on petrol, there were a slew of measures to secure extra revenue, many of which were justified. There will be a 20 per cent increase in fair value. In addition, Balagopal said property tax, application fee, scrutiny fee and permit fee for the construction of residential and non-residential buildings will be revised.

There will also be an increase in stamp duty on flats from five to seven per cent. A graded increase in the one-time cess will be levied on all ranges of vehicles.

Also, there will be a one per cent increase in the one-time tax levied on vehicles in most cost ranges. However, the lower and middle segment vehicles -- those costing up to Rs 2 lakh and in between Rs 5-12 lakh -- have been slapped a 2 per cent increase in the one-time tax.

Judicial court fee charges, too, have been increased. Electricity duties applicable to commercial and industrial units have been increased to 5 per cent.

Dangerous compression
Question is, was Kerala under such enormous fiscal stress that it had no choice but to introduce new fat levies, especially the fuel cess.

The fine print says no. Incidentally, figures also show that Balagopal has presented a hyper-conservative Budget on Friday.

When he presented the budget figures last March, he had estimated that the revenue deficit for 2023-24 would be pegged at 2.22 per cent or Rs 24,985.98 crore. Considering the post-pandemic need to pump enough money into an economy that had stagnated for virtually two years, this made sense.

The Finance Department itself made a logical case for such a fiscal roadmap. "As the economy is badly impacted by natural disasters and the recent pandemic, the recovery is yet to be broad-based. Therefore, huge fiscal correction by expenditure compression can adversely affect recovery of growth," the Medium Term Fiscal Strategy released last year said.

As it turned out, Balagopal brought down the RD to 2.11 per cent, or Rs 23,942.24 crore. The projected RD has contracted by Rs 1043.74 crore (Rs 24985.98 crore - Rs 23942.24 crore).

This also reveals that even without the Rs 750 crore he wants to collect additionally from the public by making fuel costlier, he could still have had the satisfaction of a lower RD than projected.

Defying Isaac's logic
This need to keep spending up was especially critical for the ongoing fiscal.

Still, proving himself to be one of the most conservative finance ministers Kerala has seen, Balagopal chose to reduce the RD from the accepted 2.30 per cent to 1.96 per cent.

A revenue deficit of Rs 22,968.09 crore would have been fine this fiscal, even beneficial. Yet, Balagopal thought it wise to reduce it by Rs 3053 crore to Rs 19,915.53 crore. Balagopal's predecessor T M Thomas Isaac had consistently raged against such fiscal consolidation tactics.

It was a combination of two factors that helped Balagopal achieve conservative reduction. The first one, rising revenue, was pure post-pandemic luck. The other was the dangerous economic strategy of expenditure compression.

After an artificial lid on private consumption during the pandemic, the state saw a boom in consumer sentiment during this fiscal. Result: there was a 20.3 per cent growth in tax collection, the highest after 2013.

Nonetheless, this did not match Balagopal's exceeding expectation. Perhaps to make his fiscal figures look good, Balagopal had last year estimated a 27 per cent growth. Even then a 20 per cent plus growth in tax was stupendous.

Balagopal's miserly instincts
When there is an increase in revenue, the Keynesian logic is to stir a pandemic-scarred economy with additional infusion of funds so that the post-pandemic rebound is sustained.

Instead, to project lower deficit figures, Balagopal did the opposite. He spent little, especially in the critical social and development services sector, under which falls education, health and agriculture.

If in 2021-22, the total spend for 'social and development services' was Rs 60,487.02 crore, it has fallen to Rs 56,772.34 crore this fiscal (2022-23).

Expenditure on public health fell to Rs 2465.61 crore this fiscal from Rs 3572.46 crore. Expenditure on education fell to Rs 25451.34 crore from Rs 28,285.06 crore in 2021-22.

Agriculture spending,too, saw a dramatic fall; from Rs 1572.95 crore to Rs 1140.59 crore.

Return of recession?
Here is one major concern most economists Onmanorma talked to have. Like he did this fiscal, Balagopal might attempt to lower expenditure from even the estimated levels in his Budget and achieve an even lower revenue deficit.

If this happens, Kerala could slip into a recession on account of a combination of two factors. One, a compression of government expenditure. Two, a drop in consumer sentiment as a consequence of inflation fuelled by the Budget-induced high cost of fuel.