Central grants keep bankrupt Kerala afloat, says economist Dr B A Prakash

A worker holds a nozzle to pump petrol into a vehicle at a fuel station in Mumbai, India, May 21, 2018. File Photo: REUTERS/Francis Mascarenhas

The COVID-19 pandemic has resulted in a major economic crisis and recession in the country, spurring unemployment and slashing the income of people. The GDP, too, has been hit. People, already burdened by debts, are further bogged down by the ever-rising fuel prices.

What are the justifications for the rapidly increasing fuel price? Could interventions by Central and state governments bring respite from the rising prices? How serious is the financial crisis in the state? In a freewheeling conversation with Manorama Online, economist and former chairman of State Expenditure Committee and Fifth State Finance Commission Dr B A Prakash discusses the financial health of the state.

Why raise fuel prices in a crisis
The argument that public sector oil marketing firms are responsible for the fuel price hike does not hold much water. Though the price of crude oil has increased recently, the central and state government taxes are responsible for the higher fuel price in the country. People are going through a financial crisis due to COVID-19. Global financial organisations such as the International Monetary Fund and World Bank view the current financial crunch as the biggest after World War II.

Workers have been massively hit, with several of them losing employment. Many people with no means to live are committing suicide. The fuel price is being hiked even as we are going through such a bad phase. The price of a domestic LPG cylinder was Rs 603 in December. It increased 48 per cent to Rs 894 in September. The price of petrol increased by more than Rs 20 a litre after January, and diesel price shot up by more than Rs 25 a litre.

BA Prakash
BA Prakash

The central and state governments have been trying to wash their hands of the fuel price hike by blaming public sector oil marketing companies. The taxes imposed by the central and state governments are to blamed for the increasing price. When petrol was priced Rs 100 a litre, the base product price was only Rs 44, while Rs 33 was central excise duty and central road infrastructure cess. The state's GST and cess comprised 23 per cent.

The justification is that funds are required for the governments' development and social welfare schemes. In fact, there is no justification for imposing additional tax and increasing the fuel price at a time when crores of people are rendered unemployed, and uncertainty shrouds all sectors.

What should be the priority?
The priority should be on ensuring income to the common man, and protecting his financial security, which is now the focus of developed nations. Jobs should be protected in the private sector, as well as of those self-employed, and private entrepreneurs. Exploitation of people by imposing additional taxes on the pretext of development cannot be justified. We are violating all economic theories that come into play during a global recession. The central and state governments should provide tax relaxation and control the fuel price.

The fuel price hike affects the travel fare and freight charges, which shows a proportional increase, leading to a hike in the price of all commodities. To find a solution to the price hike, the central and state governments should be willing for a compromise. Slashing one-third of the current taxes and cess will check the fuel price from going north.

Kerala's finances are worrisome
Kerala is one of the states that bears the major brunt of fuel price hike. Of the 88 lakh ration card-holders in the state, 37 lakh falls under the below poverty line (BPL) category. Kerala has 142 lakh motorised vehicles, including 92 lakh two-wheelers, seven lakh autorickshaws and five lakh four-wheel goods carriers. It is the common man who uses these vehicles.

Kerala Finance Minister KN Balagopal
Kerala Finance Minister KN Balagopal

A sound financial health is the prerequisite for any government's development, welfare, disaster relief activities and for better governance. However, the continuing skewed fiscal policies, incompetence and unnecessary spending have affected the government's fiscal health. The pandemic-caused crisis and pay revision further deteriorated the financial health of Kerala. The statistics on the state's finances are worrisome.

The Comptroller and Auditor General (CAG) has prepared a report on the state of Kerala's finances of the past five months. According to the CAG report, the state's revenue deficit during the five months from April 1 to August is Rs 28,256 crore. It means, the deficit during five months was higher than the previous 12-month period. It points at a major financial crunch.

The fiscal deficit during the financial year 2020-21 was Rs 38,189 crore. The deficit during the past six months (two quarters) alone is Rs 34,657 crore, higher than the previous four quarters. The external debt was not incurred by rolling out welfare or development activities. A lion's share of the state's revenues is spent on paying the salaries and pensions of government and public sector employees. The state will incur an additional burden of Rs 6,000 crore once it implements the recommendations of the new Pay Commission.

Government and public sector employees were the only people who were secure during the pandemic. The state will bear the additional burden by revising the pay of these employees. Two Expenditure Committees had recommended revising salaries only once in 10 years. The 10th pay commission, too, pointed out that the state's finances allow pay revision only once in a decade. The recommendations were ignored when the government went for implementing salary revision every five years.

A few committees set up during the pandemic pointed out that extending the pension age by a year would help in saving Rs 4,000 crore. This argument is baseless, since a year later, the government will have to pay a consolidated amount of two years. This will further add to the financial burden. The recommendation for raising the pension age is not acceptable at a time people in all sectors have lost their jobs, and employment opportunities have shrunk for the educated youth.

Kerala's finances in the red
All studies have found that the state finances are in the red. The biggest challenge Kerala faces now is that neither politicians nor officials have taken the studies seriously. The LDF government had issued a white paper on the state's finances in 2016. It said only a hand-to-mouth existence would be possible considering the state's revenues and borrowings.

The white paper also predicted that the fiscal condition, if not improved, would not be enough for paying salaries, pension and repayment of loans by 2021. We have reached that stage now. Even before COVID-19, the government had put a cap of Rs 1 lakh on bills, except salaries and pensions, that could be passed by treasuries. The Rs 1 lakh ceiling was placed due to the deteriorating financial situation. The treasuries passed bills pertaining to only salaries and pensions without restrictions in 2019, which adversely affected the functioning of several local self-government bodies.

The 2016 white paper also talked about the financial crisis, but the government failed in improving the situation during its first four years in office. The pandemic swept through the country in 2020 March, shattering the state's finances. The revenue deficit increased by 60 per cent to Rs 23,256 crore in 2020-21 from Rs 14,495 crore in 2019-20.

Most other states are revenue surplus since they utilise the loans for development and capital investment. Kerala, however, uses the loans for daily expenditure and to bridge the revenue deficit. The state's fiscal deficit during 2021-21 was Rs 38,190 crore. The tax and non-tax revenues dipped by 11 per cent and 48 per cent, respectively, during the fiscal year.

Outside Kerala Treasury Office
Outside Kerala Treasury Office. File photo

Centre keeps treasuries running
The grants from the central government ensured the treasuries functioned. Kerala received Rs 11,235 crore as grants from the Centre in 2019-20, which increased 176 per cent to Rs 31,049 crore during the first Covid wave in 2020-21. Kerala received such a huge amount as revenue grants following the 15th Financial Commission's recommendations that the state has become bankrupt. The GST compensation and grants (post devolution revenue deficit grants or PDRD grants, provided as per Article 275 of the Constitution to help States bridge the gap between the assessment of revenue and expenditure) based on the commission's recommendations helped Kerala in keeping its treasuries up and running.

The 15th Financial Commission, which examined the financial state of all Indian States, found West Bengal's financial health to be the worst. Kerala figured next to Bengal. The Commission allotted Rs 37,814 crore as revenue deficit grant, preventing the Kerala economy from crumbling.

Increasing taxes during COVID-induced recession to increase revenues is not desirable. It is better to avoid splurging, additional expenditure, unnecessary posts and establishments to save the available finances.

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