Having scored a comprehensive win, a major challenge of addressing the precarious finances of their governments awaits the chief ministers of Kerala, West Bengal and Tamil Nadu who are set to assume or resume office.
Kerala, in particular, faces a difficult situation, compounded by the pressure on remittances from its migrant workers abroad and falling prices of cash crops such as rubber. Both these have adversely impacted overall economic activity and, in turn, revenues for the government.
Just three expenditure heads – salaries (Rs 27,742 crore), pensions (Rs 15,503 crore) and interest payments (Rs 12,630 crore) — are expected to consume over two-thirds of the Kerala government’s total budgeted revenue receipts of Rs 84,093 crore for 2016-17. That leaves hardly much for capital and other development expenditures. Borrowings can be an option, but for a state with outstanding liabilities of Rs 141,520 crore or 28.5 per cent of its gross domestic product (revised estimates for 2014-15), there are limits to contracting further debts.
At 35.5 per cent, the debt-GDP ratio is even higher for West Bengal. Interest payments account for 22.5 per cent of West Bengal’s revenue receipts — the worst for any state. These ratios were, in fact, worse at 40.4 per cent and 27.1 per cent respectively in 2011-12, the year when Mamata Banerjee first assumed office. Since then, there has been some effort at fiscal consolidation, though it is still very much work in progress.
Currently, West Bengal and Punjab — which goes to polls early next year — rank among the two most indebted states in the country.
Tamil Nadu, by comparison, isn’t as fiscally stressed, despite the J Jayalalithaa government’s implementation of a host of welfare schemes — from an expanded public distribution system and mid-day meals for schoolchildren, to providing free grinders, mixies and table fans – and promising even more in its new innings. As of now, the state’s debt-to-GDP and interest payments-to-revenue receipts ratios aren’t alarmingly high (see table).
But since 2013-14, Tamil Nadu, too, has been running revenue deficits. For 2016-17, the state’s revenue expenditures of Rs 161,159 crore are slated to over-shoot its revenue receipts by Rs 9,155 crore.
While presenting his government’s interim Budget on February 16, state finance minister O Panneerselvam said the huge revenue deficit was “unavoidable”. He laid the blame for this mainly on lower sales tax revenues from petroleum products.
It is Kerala, however, that will bear the brunt of low oil prices not just because of sales tax collections, but even remittances, taking a hit.
In 2014, total remittances from its roughly 24 lakh emigrant workers were estimated at Rs 71,142 crore. With the crash in global crude prices wrecking the public finances of the oil-rich West Asian economies – where these workers are based – it has led to their governments undertaking spending cuts and restricting employment opportunities for expatriates. The effects of it on incomes, spending and tax revenues in Kerala are probably still to fully unfold.
The fiscal rules proposed by the 14th Finance Commission require states to achieve zero revenue deficit by 2015-16. Tamil Nadu has already sought to amend its Fiscal Responsibility Act to seek an exemption to meeting this target.
The outgoing United Democratic Front (UDF) government in Kerala made it clear that it would be “difficult” to achieve not only zero revenue deficit, but even the fiscal deficit goal of three per cent of GDP.
Whether the new Left Democratic Front (LDF) regime will sing a different tune remains to be seen.
Kerala has been favourable to the implementation of the Goods and Service Tax: Being a predominantly consumer state, a destination-based tax is seen to help bolster its revenues. In this, the stance of the LDF is unlikely to be different from the UDF.