Thiruvananthapuram: The financial position of the state government is extremely weak, according to former State Finance Commission chairman B A Prakash.
In an exclusive interview to Onmanorama, he said that the state's fiscal situation was grim due to sharp fall in tax collection and lack of control on expense.
"We are in the midst of a severe financial crisis. Some bold and radical measures are required to tide over it, but I don’t think this government will be ready to do that," he said.
The state faced its biggest financial crisis in during the 199-2000 period. The current situation is more or less similar to that. All that the Treasury is doing now is clearing salary and pension bills. It is not easy to overcome this decline. The decision to change the pay revision committee's recommendation for one increment for 10 years of service to five years was a major reason for the current situation. It has imposed a huge burden on the government exchequer.
If we look back on the past 30 years and take stock, it is evident that whenever the state had gone in for revision in the salaries and other benefits of government employees, it had plunged into a crisis. The reason was same in 1998 as well. The government had to spend an additional Rs 7,300 crore in the 2016-17 fiscal. Last year, the figures were Rs 6,630 crore. Now the amount set aside for salaries and pensions comes around Rs 50,000 crore. I think this is the primary cause of the shocking state of the state's finances.
Both fronts score high in splurge
Governments in Kerala have so far been indulging in mindless and indiscretionary spending. Every sector is witnessing pointless waste of money. There are many departments that serve no purpose. The cash-strapped government continues to splurge on luxury vehicles. On the one hand, ministers and legislators receive unlimited medical allowances, while on the other, the government is struggling to find money for the KSRTC to pay pensions.
Will GST play spoilsport?
The state’s main revenue was from the Value Added Tax (VAT) before the Goods and Services Tax (GST) regime was introduced. The VAT accounted for about 75 percent of the state’s total revenue from taxes. The other state taxes make up a very small portion of tax revenues. The total revenues from the taxes come around Rs 42,000 crore. An increase of 10-15 percent in that earning will not make much of a difference. The government needs an additional Rs 7,500 crore for salary and pension requirements. It will not be an easy task to collect the tax arrears since most of the major defaulters are various government departments. If the Water Authority does not get enough funds, how will it function?
It will take many more years for the structural reforms introduced as part of the GST regime, including the rate structure, e-governance, GST portal, and the filing to be on track. Finance Minister Thomas Isaac has claimed that the GST will benefit Kerala with at least 20 percent tax revenue increase. He is living in a dream world! Tax collection under the GST in the state has so far registered only a 10 percent growth. It many increase to 14 percent in the near future, but a 20 percent growth is unrealistic.
Foreign remittances to Kerala, particularly from the Gulf region, have witnessed a downward slide. A crisis is brewing in the construction sector. All these issues have resulted in big revenue loss. The only positive sign is the increase in revenues from the motor vehicle tax. As far as Kerala is concerned, tax collections trend upward in proportion to the increased economic growth, and it comes down when the growth slows down. The existing scenario does not look so rosy.
How to tackle the crisis?
Adding various fees, user charges, government rent, and lease rent on government land to the tax regime would increase the revenue by Rs 8,000 crore. The chances of hiking state taxes are slim because most of the tax rates are already high. There are 114 departments under the state government. Are they all required? Staff too are in excess. It is up to the government to take a call in this regard.
The number of aided institutions too is high. The government needs to cut spending on them. Unnecessary perks and incentives as well as administrative expenses should be avoided. The crisis will not end unless the government returns to the 10-year salary revision structure.
Future looks bleak
The demonetization has had an adverse impact on the state's economy. Traditional industries and small-scale entrepreneurs are still reeling under the impact of the move. Then came the GST which triggered a price rise across the board. The state too has borne the brunt of the new tax regime. Industrial sector took a hit and the overall growth of the state’s economy slowed down.
To add to the woes, revenues from taxes also came down. The finance minister's announcement that the government would make all efforts to cut down expenditure is welcome. But it is to be seen whether these measures would be enough to tackle the ongoing crisis.
There is every chance of a deep and pervasive crisis in other areas too. As witnessed by the KSRTC, disbursal of salaries and pensions in universities too may get delayed. Nevertheless, it is not easy to overcome a financial crisis. The government will have to resort to tough measures to put itself on a sustainable footing again, but it is most unlikely.
