ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846
-A A +A

Kerala’s Fiscal Stress


Despite “good tax effort” and faster economic growth, Kerala’s fiscal stress has remained a puzzle for all these years. The article “Kerala’s Persistent Fiscal Stress: A Failure in Public Resource Mobilisation?” by Jose Sebastian (EPW, 1 June 2019) has convincingly cracked it. Among the several important findings and observations of the author, one that fascinated me is the role of “scholarly studies” in reinforcing the widely held perception that Kerala is a highly taxed state. The penchant of the political class and bureaucracy to engage in competitive populism is understandable.

In the instant case, “scholarly studies” came in quite handy for them to engage in the kind of fiscal profligacy, which is likely to land the state in a debt trap sooner or later. The duty of the academic community is to reveal the bitter truth to the society. Unfortunately, the academic community of Kerala is also divided between the United Democratic Front and the Left Democratic Front, two alternating political fronts. When “centre baiting” was fashionable, it was quite natural for some of them to ally with the political class.

But how did elite institutions like the National Institute of Public Finance and Policy which claimed lakhs of rupees through consultancy assignments on Kerala’s finances fail to overcome the methodological “inadequacies” of scholarly studies? This omission equally applies to the Gulati Institute of Finance and Taxation, an autonomous institution formed by the Government of Kerala in 1991 for studying the public finances of the state, and which the author has been with since 1994. These questions are quite pertinent considering the fact that the state has irrecoverably lost hundreds and thousands of crores of public resources over the last three and half decades. In the process, the middle class and rich could transfer the burden of public resources to the poor and marginalised. As the author rightly observes, there is no easy escape for Kerala as the whole society is accustomed to a culture of free lunches.

Thus, the author has identified the most important reason for the chronic fiscal crisis of Kerala as failure in public resource mobilisation and established the high commercial tax potential of the state. Kerala is a state where more than 80% of the consumables are bought from other states. There are around 100 check posts around the borders. Among them, 20 are very important. These check posts pave the way for most of the tax evasion. While the average revenue growth during 2005–06 and 2010–11 was only 17.3%, in 2006–07 it was 23.3% thanks to the “operation check-post” adopted in check posts like Walayar, Amaravila, etc. This tempo could not be maintained for long and revenue growth relapsed into the old track once again. The goods and services tax would do away with tax evasion altogether, everybody believed. From 1 April 2018 onwards, the E-Way Bill was introduced to make the system fully online and transparent. When malpractices continued, and revenue growth slowed down, the National Anti-profiteering Authority (NAA) was formed with punitive powers in November 2018. In spite of that, tax revenue growth in 2018–19 was 10.3%. It is high time that the state, with the help of NAA, adopts international best practices to eliminate check-post malpractices and to augment commercial tax revenue growth.

Revenues come not only from taxes but also from non-tax sources. The World Bank, on the basis of a study of 166 countries—both rich and poor—found that non-tax revenue accounts for around 39% of the revenues of the countries. In Kerala, non-tax revenue was a meagre 6.82% of revenue receipts in the state in 2003. However, because of the recommendation of the Third Kerala Public Expenditure Review Committee, the government revised some of the non-tax revenue sources and non-tax revenue as percentage of revenue receipts improved to 12.82% in 2016–17. Kerala has a broad base of non-tax revenue and high potential to raise non-tax revenue, owing to the achievement of high human development indicators.

It is against this backdrop that the borrowing spree of the present government through the Kerala Infrastructure Investment Fund Board has to be viewed. The state is borrowing at a high cost through this off budget mechanism for infrastructure development. The middle class and rich in Kerala, which thrived on light fiscal burden all these years, are again going to be pampered. When will wisdom dawn on the political class to tell the public the bitter truth that ultimately public resources have to come from them only? Sebastian’s article has thrown up an opportunity for them to deepen peoples’ understanding of Kerala’s public finances. This is the only way to pull Kerala society out of the fiscal illusion in which it is long immersed. One hopes it will generate debates and discussion among the broad spectrum of Kerala’s civil society.

Mary George


Updated On : 12th Jul, 2019


(-) Hide

EPW looks forward to your comments. Please note that comments are moderated as per our comments policy. They may take some time to appear. A comment, if suitable, may be selected for publication in the Letters pages of EPW.

Back to Top