Kerala’s unending financial woes

Presenting Kerala’s first budget for the Millenia 2001-02, then Finance Minister K Shankaranarayanan has worryingly said, ‘ It is with deep humility that I’ve taken by onerous responsibilities. It would not in the least, be an exaggeration to state that I have been handed down a practically empty treasury. The exchequer bequeathed to me is truly in a woeful state. Even though the state has shown an increase in revenue collections over the years, the state continues its deep financial woes. The root cause of this is gross mismanagement of public revenue over the years and the failure to capitalize on the reforms being undertaken by the center.

The Government of Kerala recently organized a demonstration at Jantar Mantar to express their dissatisfaction with the non-devolution of tax revenue to Kerala during the fifteenth finance commission. Similarly, the state of Karnataka also held a protest on the same issue a day before. While states have the right to peacefully protest against the Union, it is important to acknowledge that the Central government cannot reduce tax devolution to any state for political reasons. The main cause of the current financial crisis in Kerala is the mismanagement in the collection and utilization of revenue. According to a recent report by CAG, the state has outstanding arrears in revenues amounting to approximately 28,258 crores, which is around 24.23% of the total revenue. While for the year 2020-21 the financial commission grant received was 18048.8 crores, till December 2023 for FY 2023-24 was only 4294. 28 crores. The financial commission grants are granted to states based upon certain conditions stipulated in the grant components.

When there is a delay in compliance of the same, it leads to a decrease in release or its lapse. The state has to ensure that such a delay in compliance reporting doesn’t happen. The poor collection and utilization of revenue, coupled with increasing revenue expenditure, slowness in the filing of compliance reports, inadequate investment in capital, and gross mismanagement through excessive spending by executives, are the factors contributing to the present financial crisis. The central government bears no responsibility for this situation. According to the report ‘State Finances: A Study of Budgets of 2023-24’ by the Reserve Bank of India, the outstanding liabilities of Kerala have increased by 165% from 2016 to 2024. The state’s outstanding liabilities rose from Rs 162271.5 crores in 2016 to Rs 429270.6 crores in 2024 as per the RBI report.

The budget estimates for 2024-25 indicate that the total revenue receipts of the state are expected to be Rs 138655.16 crores, with a significant state share of Rs 84883.51 crores. Given the expectation of such a large revenue from its own collections, it is crucial for the state to focus on strengthening and enhancing tax collection processes. Kerala anticipates a total expenditure of Rs 184327.33 crores, with Rs 166501.21 crores allocated solely for revenue expenditure. These figures highlight the existing weaknesses within the state’s economic system. The Kerala Government has accused the Centre of imposing borrowing restrictions on the state. The Union Government follows a standardized approach in determining the annual borrowing limit for all State Governments, as outlined in Article 293(3) of the Constitution of India.

These limits are determined based on the recommendations of the Finance Commission, with no consideration given to political factors. Only the financial positions of the states are taken into account. Currently, the net borrowing limits are set at 3 percent of the Gross State Domestic Product. Consequently, the normal net borrowing limit for Kerala in the Financial Year (FY) 2023-24 is Rs. 32,442 crore. Therefore, it is unreasonable to blame the central government and organize a protest rally in Delhi for this matter. Kerala should prioritize reducing its revenue expenditure, increasing investment in long-term capital expenditure, and focusing on fiscal consolidation. It is crucial to promptly collect pending dues and minimize litigations. In the fiscal year 2021-22, the state recorded approximately 21,078 cases of SGST evasion, highlighting the need to streamline processes in the state GST department and Motor Vehicle departments.

The modernization of cooperative banks in Kerala and their integration into a single IT network should be given high priority. Timely submission of compliance reports is necessary for obtaining finance commission grants. The state must shed its lackadaisical attitude in submission of compliance reports as requested by the center. The state should explore the possibility of resolving tax collection cases through a legislative framework to ensure timely resolution. It is imperative to restore investor confidence and make investments to harness the potential of industrial and agricultural sectors. Rather than blaming the central government for the current financial crisis, the state should introspect and take collective action with the support of civil society to revive its struggling economy.