Fiscal Distress Worsens

Kochi, September 16: | Updated: Sep 17 2003, 05:30am hrs
Kerala's efforts to totally eliminate revenue deficit by 2006-07 going by its fiscal responsibility Bill-2003 passed recently, will remain an uphill task given its track record in containing budgetary deficits.

In a recent study on `fiscal management in Kerala: constraints and policy options' by the Centre for Socio-economic and Environmental Studies (CSES), noted economists KK George and KK Krishnakumar say despite the best intentions proclaimed off and on, all fiscal indicators showed worsening of the state's fiscal distress.

The ratio of the gross fiscal deficit (GFD) to the Gross State Domestic Product (GSDP) stood at a record high of 7.3 per cent at the end of 1999-2000, the latest year for which reliable provisional GSDP data were available. The revenue deficits to GSDP ratio stood at 5.8 per cent. The study attains added relevance in the wake of the recent Bill that stipulates that the ratio of the GFD to the GSDP does not exceed 1.5 per cent.

Dr George says that while all states were reeling under fiscal distress, the volume of deficits in Kerala was much higher. Yet the government continued with the softer option of borrowing at increasingly usurious rates. Debt servicing now accounted for 69 per cent of the fresh borrowings made to cover the GFD. Besides abdicating its responsibilities by withdrawing from social sectors, the state had also started cutting its expenditure from 2000-01 but not in a planned manner. The growth rate of government expenditure declined steeply from 21.6 per cent in 1999-2000 to 1.9 per cent the next year. The growth rate in capital expenditure had been negative during the last three years. Salaries, pensions and interest payments accounted for 71 per cent of the revenue expenditure.

On the resource mobilisation front, the performance of the state was poor.

The decline in the growth rate of own non-tax revenue was steeper than that of own tax revenue. The average growth rate of the share in Central taxes received by the state came down from 16.5 per cent in the early 90s to nine per cent. The deepening fiscal crisis in the second half of the 90s was more on account of the low growth rate of revenue receipts in relation to the growth rate of revenue expenditure.

There was a strong case for additional resource mobilisation by exploiting the non-tax revenue (NTR) sources. NTR was not growing as fast as the tax revenue and revenue expenditure and the share of own NTR in the total revenue was steadily declining to be at 10.1 per cent at the end 2000-01 from 13.5 at the start of the decade.

According to the study, the low level of non-tax revenue was on account of the rate of recovery expenditure on public services which was 4.4 per cent in 2000-01; returns on direct government cumulative capital outlay at five per cent, poor dividends on government investments at 0.63 per cent and a one per cent interest recovery on government loans.

The state budget was paying a very high price for maintaining its PSUs and co-operatives at their present state of inefficiency. In the state which has the largest number of PSUs for which the government has extended loans to the tune of Rs 3,544 crore at the end of 2000-01. Outstanding investments amounted to Rs 1,883 crore.

In such a precarious situation, the state would not be able to continue with the istatus quor and fiscal reforms brooked no delay, Dr George said. But any knee-jerk reactions could lead to more harm both to the reform process and the state's development. The objective of the fiscal reforms should be to sustain the Kerala model and its achievements, he added.