Analysis | Is Kerala in the grip of worst-ever recession?

Finance Minister Thomas Isaac

Here is the telltale unmistakable evidence that Kerala is passing through perhaps the worst-ever recession in decades.

The state's tax revenue from two items that are out of the Goods and Services Tax net, petroleum products and liquor, has for the first time ever demonstrated a sharp decline.

The growth in non-GST revenue was till now perhaps the most predictable item in the state's budget. It had unfailingly grown at 15-16 per cent every year for decades. This fiscal, in what is seen as a disturbing fiscal anomaly, it has dropped below 10 per cent.

Only recession can cause this. No sales suppression or tax evasion is involved because trade in petrol and liquor is fully controlled by the government; the Centre's oil companies like Bharat Petroleum and Indian Oil in the case of petroleum products and Kerala government's Beverages Corporation for liquor.

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Stage two recession

“Though the Beverages Corporation put out figures saying it had record collection during Onam this year, the sale of liquor in general has shown a fall. However, much of the fall in the non-GST component owes to the steep drop in petroleum consumption,” a top finance department official said.

Economist and tax expert Jose Sebastian calls this the “second stage of recession”. “The first stage had economic activity in general slowing down. We had long before crossed that. Shops were shuttered and the construction sector turned near stagnant. Now with less money to spare, we have come to a phase where people travel less. Autorickshaws and taxis are finding less takers. People are not inclined to buy a new car either. All of this has led to a fall in petrol consumption,” Jose Sebastian said.

Traditionally, the ratio of the sales tax component to the VAT (now the GST) component in the total tax revenue has been in the 48:52 range. During the ongoing 2019-20 fiscal, a dangerous imbalance has crept in; the share of sales tax from petrol and liquor (the non-GST component) has fallen to between 30 and 35 per cent.

“The sales tax from petrol and liquor has been what economists call ‘minimum guarantee’ revenue, free of evasion and generally untouched by the shifts in purchasing power,” the finance department official said. “If it has fallen alarmingly, it can only mean that there is stagnation in the economy,” he added.

Onam scare

What made the finance department press the panic button was the shocking fall in non-GST revenue noticed during the months of August and September, the Onam season, when consumption in Kerala soars dizzyingly.

If the August and September non-GST collections during the 2018-19 fiscal were Rs 1450.50 crore and Rs 1664.29 crore respectively, they were startlingly low at Rs 1010.43 crore and Rs 1182.62 crore this August and September.

“Liquor is mostly consumed by the poor. Many in the unorganised sector had lost jobs right at the time of demonetisation. Now with jobs in the construction sector also vanishing, the lower-income groups are left with little or no money for their usual after-work drinks,” said Jose Sebastian.


Shocking change of habit

The finance department did a recent study in Ernakulam, the hub of Kerala's business activity, to get some sense of what is happening. It identified top companies in various sectors and made an assessment of the tax revenues from them. There was an across-the-board fall in revenue.

The huge fall in revenue from construction (cement, builders) and automobiles was further confirmation that the state was in the grip of a deep recession as these sectors were usually insulated from normal fiscal shocks.

The finance department's logic has always been that the Malayali's yearning for the bottle and his desire to own a car and a house were not dependent on his purchasing power. This fiscal, the department was forced to do a rethink.

Tight-fisted Modi

The less than anticipated GST growth is only a symptom of the larger problem. It is not worrisome either, at least in the short term. Of course, the growth, at 11 per cent, is hugely disappointing. But finance minister T M Thomas Isaac knows any drop in GST growth below 14 per cent will be compensated by the Centre.

The Centre has promised to make up the deficit if the annual GST growth of a state does not touch 14 per cent. This benefit will extend all through Isaac's current term and even more, till the 2021-22 fiscal.

The finance minister's only worry is the infuriating delay in getting the compensation. The Centre is legally bound to transfer the compensation amount of two months on the first working day of the third month. The compensation of Rs 1,636 crore for the GST shortfall in August and September should have come to the state on October 1. And the compensation of Rs 1,593 crore for the GST deficit during October and November should have reached on December 1.

The BJP dispensation at the Centre has not transferred both these compensation packages – a total of Rs 3,229 crore – to the state. This has forced Isaac to clamp severe treasury restrictions.