If Kerala was a sovereign nation and had its central bank that lent to meet its entire budget deficit, the state would not have been burdened with the long list of overdue. But Kerala is a sub-national entity of India and both have deficit and debt limits. Moreover, the Reserve Bank of India (RBI) has stopped monetising the government deficit long ago. With not much space left for increasing market borrowings, Finance Minister K N Balagopal has to look at increasing revenue and reducing expenditure.

Increasing revenue
Growth in tax revenue for Kerala is currently above the national average and in an election year, increasing taxes on fuel, as was done in the previous budget, would be inflationary and unthinkable. His options on the indirect tax front are plugging leaks, if any, and the collection of arrears.

What about non-tax revenue? Stamp duty and registration fees have been hiked earlier and revenue from those heads have increased. But these fees are paid only on the sale or transfer of land, and capital gains from such deals are taxed on sales.

But what about those continuing to hold property which has seen price appreciation due to infrastructure development such as highways and road widening? Neither capital gains tax nor stamp duty/registration fees can capture that. One option is to link land and building taxes to the market value of the land and do a periodic revision of the market value. And this will be a progressive tax as only those gaining are taxed. User fee hikes for the non-welfare government services that have not kept pace with GDP growth are another option to increase revenue.

Reducing expenditure
The per capita GDP of Kerala is way above the national average and income is distributed with relatively less inequality. Also, it is the state with the least multi-dimensional poverty in India. Thus welfare should be confined only to the most deserving. Hence eligibility criteria for welfare have to be tightened and leakages plugged. An increase in prices of provisions at Supplyco is a step in the right direction and more such options shall be explored.

Beyond the Budget
Annual budgets give shape to the blueprint of Kerala’s economic vision and architecture. Taking a step back to revisit and reshape that blueprint seems a worthwhile exercise.

Pay Commission and salaries: In a recent interview, FM Balagopal proudly claimed that Kerala was the only Indian state that hiked salaries of the government employees in the Covid period. GSDP went negative during the pandemic and much of the remaining 97 per cent of the population faced income and job losses. In such a backdrop, is hiking staff salaries something to be proud of? Decreasing the frequency of pay revision to seven or 10 years, as recommended by several Pay Commissions, would have given the state some fiscal headroom. Will the government bite the bullet, at least this time, by postponing the next hike to 2028?

Relook at PSUs: NDA at Centre has declared that companies in the strategic sectors will be retained as PSUs and the remaining would be sold off. But in Kerala, both UDF and LDF have declared a ritualistic backing of PSUs with no rationale. One can understand a Supplyco selling provisions at subsidised rates incurring losses. But what about KSRTC which is not providing any net subsidy and being the loss leader among PSUs? Scrapping such PSUs will stop the bleeding of tax revenues which can be better deployed elsewhere

Migration and remittances: The state GDP of Kerala is around Rs 11 lakh crore (at current prices) and the remittance received in 2022 is estimated at Rs 1.1 lakh crore. Thus, remittance amounts to 10 per cent of the GSDP. For the whole country, remittance was just under 4 per cent of the GDP. Thus Kerala has a higher dependency on remittance. But recently it was removed as the top state receiving the NRI money.

Migration to the Gulf helped Kerala reduce unemployment while benefiting from remittances. But of late, migration has shifted to Europe, North America and Australia/New Zealand. Though a fall in remittance was expected, till now it has not happened as the contraction in GCC remittances has been made up by expansion from the US and the UK. But non-GCC migrants prefer to settle abroad and hence a gradual fall in remittances cannot be ruled out. So how can we fill the gap? Only by boosting economic activity at home.

Boosting economic activity: The cost of land and labour is high in Kerala and land acquisition is extremely difficult. Hence manufacturing is not suited for Kerala. However, knowledge industries are thriving in metro cities of India with even higher land prices. With excellent road, rail, air and telecom network connectivity and a well-educated labour force, Kerala is ideal for knowledge-based service industries. It can also look at being an Asian centre for medical tourism and an Indian centre for higher education. Most importantly, if we are to retain our youngsters, better education and well-paying service sector jobs have to be created here.

Climate change preparedness: Climate change vulnerability is relatively higher compared to many other states and disaster relief spending is likely to go up in the coming years. This is all the more reason for rationalising expenditure whereas funding from growth will take time.

Fiscal federalism: The 6th Finance Commission has been constituted and states should band together to get cess and surcharges included in the divisible pool of taxes, which currently is not. Another issue is the limit on deficit and borrowing. There is wide consensus on not running a revenue deficit but should deficit and debt limits choke borrowing for capital expenditure? As advised by the 15th Finance Commission, the Union government should review the FRBM framework and explore the possibility of higher borrowing for capital expenditure for an infrastructure-deficient country like India. Such a change will help Kerala’s finances by taking KIIFB borrowing off the state’s books but the government has shot itself in the foot by forming Kerala Social Security Pension Ltd for welfare pension payment. KSSPL is an entity created solely to park revenue expenditure whose only place is the expenditure side of the state budget. Moreover, if KIIFB has borrowed on its own from the market, KSSPL has cannibalised the resources of KSFE, welfare fund boards and Bevco among others as borrowings!

Role of the state
None of the union governments since 1991 have backtracked on economic reforms as there is clarity and consensus on the role of the state in the economy. But governments in Kerala seem to think that the state should be everywhere and this lack of focus has largely contributed to the fiscal stress it is currently going through. It is time for a course correction and this is a crisis not to be wasted.

(The writer is an ex-banker and currently teaches economics & finance.)