Kerala Budget a case of applying band-aid when surgery is required

KN Balagopal
Kerala Finance Minister KN Balagopal presents State Budget on February 3, 2023. Photo: MANOJ CHEMANCHERI/Manorama

Resource mobilisation, but in a regressive and unimaginative manner -– this sums up the Kerala Budget 2023-24.

In the backdrop of the lowest-ever proportion of central tax allocation to the state from the 15th Finance Commission, a hike in user fees and taxes was widely expected.

But the manner of raising the much-needed revenue signalled a lack of imagination.

Resource mobilisation

Though a hike in taxes and fees was expected in the Kerala Budget FY 23-24, a cess of Rs.2 on petrol and diesel was a shocker.

What is surprising is that in the very same budget where Rs.2,000 Crore is allocated to combat price rise through market intervention, the cess on fuel aims to mobilise Rs. 750 Crores.

In addition to that, one-time tax on two-wheelers priced up to Rs 2 lakh was hiked by 2 per cent while four-wheelers priced Rs 15 lakh and above will see taxes going up by only 1 per cent - the tax on a vehicle of ordinary commuters is hiked at a rate higher than the one on premium four wheelers.

Property tax is set to go up with the fair value of land being hiked by 20 per cent along with a hike of property taxes on houses lying vacant and higher rates for owners having multiple houses.

Deficits and borrowings

Even though the fiscal deficit is set to come down from the current 3.61 per cent to 3.50 per cent in FY 23-24, the revenue deficit is set to go up from the current 1.96 per cent to 2.11 per cent in the next financial year.

A revenue deficit means the state is unable to meet all its non-asset-creating expenses such as salary, pension and interest from its revenue receipts, which comprise tax revenue and non-tax revenue such as user fees.

Thus a lower proportion of borrowing is used for asset-creating capital expenditure. But capital expenditure is the seeds sown today, which could be harvested for multiple years into the future.

Expenditure mix

A perusal of the expenditure mix shows salaries and pensions eating up around 43 per cent of total expenditure and interest at 16 per cent. That is 59 per cent of total expenditure is committed expenditure and only in the remaining portion can the government exercise discretion

Resource mobilisation constraints

With the introduction of GST, state budgets have become an exercise in expenditure allocation with not much scope for raising revenues other than on fuel, liquor and vehicles.

On top of that is the reduction in the transfer of funds from the Centre. The Centre transfers funds to states as a share of central taxes and as grants in aid.

Though the share of central taxes for Kerala is going up next fiscal, the reduction in grants in aid is more than the rise in tax share.

Presenting a budget against such a backdrop was the challenge faced by Finance Minister KN Balagopal. With the fiscal deficit capped at 3.5 per cent of GSDP, there was not much space to borrow and spend. And hence revenue had to be raised in some manner.

Kerala Finance Minister KN Balagopal presents State Budget on February 3, 2023. Photo: MANOJ CHEMANCHERI/Manorama

What could have been done?

The Kerala State Planning Board Economic Review released a week back shows the net profit, or rather the net loss figures of state PSUs under the Industries Department for the last five years.

Except for FY 21-22, the units have incurred losses in the previous four fiscals. Total loss in the four years is Rs 397 crore vs profit of Rs 104 crore in FY 21-22. And the figure up to August this FY is also a net loss of Rs.71 crore.

And this does not include the huge losses of KSRTC and many others.

What about the picture of profit-making PSUs?

Many of the profit-making PSUs are earning a return on capital well below the cost of borrowings of Kerala state.

Most of the Kerala PSUs were formed with the intent to make profits and are not like entities Supplyco which by design will incur losses.

Thus the state is borrowing funds to infuse capital into these PSUs. And even profit-making PSUs are earning profits at a rate less than the interest on borrowings.

Thus, the state could shut down such PSUs and use the capital recovered either to pay off high-interest loans reducing interest outgo or use such receipts judiciously to create social and economic infrastructure, which will attract private sector investments.

These are not ordinary times and hence out-of-the-box thinking was required. But this budget was a case of applying band-aid when the requirement was the surgeon’s scalpel.

(The writer is an ex-banker and currently teaches economics & finance.)

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