Central Grants Keep Bankrupt Kerala Afloat, Economist Dr BA Prakash Says | Economic news


The COVID-19 pandemic has caused a major economic crisis and recession in the country, boosting unemployment and reducing people’s incomes. The GDP has also been affected. People, already burdened with debt, are even more bogged down by constantly rising fuel prices.

What are the justifications for the rapid rise in fuel prices? Could central and state government interventions provide respite from rising prices? How serious is the financial crisis in the state? In a freewheeling conversation with Manorama online, economist and former chairman of the State Expenditure Committee and the Fifth State Finance Committee, Dr BA Prakash discusses the financial health of the state.

Why increase fuel prices in times of crisis
The argument that the public sector oil marketing companies are responsible for the rise in fuel prices does not hold water. Although the price of crude oil has increased recently, central and state government taxes are responsible for the rise in the price of fuel in the country. People are going through financial crisis because of COVID-19. Global financial organizations such as the International Monetary Fund and the World Bank consider the current financial crisis to be the most severe after World War II.

Workers have been massively affected, many of them losing their jobs. Many people without means of subsistence commit suicide. The price of fuel is going up even though we are going through such a bad phase. The price of a domestic LPG bottle was Rs 603 in December. It rose 48% to Rs 894 in September. The price of gasoline rose by over Rs 20 per liter after January, and the price of diesel rose by over Rs 25 per liter.

BA Prakash

Central and state governments have tried to wash their hands of rising fuel prices by blaming public sector oil marketing companies. Taxes imposed by central and state governments are to blame for the increase in prices. When the price of gasoline was Rs 100 per liter, the base price of the product was only Rs 44, while Rs 33 was for central excise tax and central road infrastructure. GST and state taxes accounted for 23 percent.

The rationale is that funds are needed for government development and social protection programs. In fact, there is no justification for imposing an additional tax and increasing the price of fuel at a time when millions of people find themselves unemployed and uncertainty envelops all sectors.

What should be the priority?
The priority should be to secure income for the common man and protect his financial security, which is now the goal of developed countries. Jobs should be protected in the private sector, as well as for self-employed workers and private entrepreneurs. The exploitation of people by imposing additional taxes under the pretext of development cannot be justified. We violate all the economic theories that come into play during a global recession. Central and state governments should provide tax relief and control the price of fuel.

The rise in the price of fuel affects the price of travel and transportation costs, which show a proportional increase, leading to an increase in the price of all commodities. To find a solution to the rising prices, central and state governments should be prepared to compromise. Cutting current taxes by one third will keep the price of fuel from going north.

Kerala’s finances are a concern
Kerala is one of the states most affected by rising fuel prices. Of the 88 lakh ration card holders in the state, 37 lakh fall under the below poverty line (BPL) category. Kerala has 142 lakh motorized vehicles, including 92 lakh two-wheeled vehicles, seven lakh autorickshaws and five lakh four-wheeled freight carriers. It is the common man who uses these vehicles.

KN Balagopal, Minister of Finance of Kerala

KN Balagopal, Minister of Finance of Kerala

Good financial health is the prerequisite for development, well-being, disaster relief activities of any government and better governance. However, the still skewed fiscal policies, incompetence and unnecessary spending have affected the fiscal health of the government. The crisis caused by the pandemic and the revision of salaries further deteriorated Kerala’s financial health. The statistics on state finances are worrying.

The Comptroller and Auditor General (CAG) has prepared a report on the state of Kerala’s finances over the past five months. According to the CAG report, the state revenue deficit in the five months from April 1 to August is Rs 28,256 crore. This means that the deficit for five months was higher than the previous 12 month period. It indicates a major financial crisis.

The budget deficit in fiscal year 2020-21 was 38,189 crore rupees. The deficit over the past six months (two quarters) alone is Rs 34,657 crore, higher than the previous four quarters. The external debt was not contracted by carrying out social protection or development activities. A lion’s share of state revenue goes to pay the salaries and pensions of government and public sector employees. The state will incur an additional charge of Rs 6,000 crore once it has implemented the recommendations of the new Compensation Commission.

Government and public sector employees were the only people safe during the pandemic. The State will bear the additional burden by revising the remuneration of these employees. Two expenditure committees had recommended revising salaries only once every 10 years. The 10th Wages Committee also pointed out that state finances only allow a review of wages once every ten years. The recommendations were ignored when the government decided to implement a pay review every five years.

A few committees set up during the pandemic have pointed out that extending the retirement age by one year would help save Rs 4,000 crore. This argument is without merit, since a year later the government will have to pay a consolidated amount of two years. This will add further to the financial burden. The recommendation to raise the retirement age is unacceptable at a time when people in all walks of life have lost their jobs and employment opportunities have dwindled for educated young people.

Kerala’s finances in the red
All studies have shown that government finances are in the red. The biggest challenge currently facing Kerala is that neither politicians nor officials have taken studies seriously. The LDF government published a white paper on state finances in 2016. It said only a day-to-day existence would be possible given the state’s income and borrowing.

The white paper also predicted that the fiscal situation, if not improved, would not be enough to pay salaries, pensions and loan repayments by 2021. We have reached that stage now. Even before COVID-19, the government had put a cap of Rs 1 lakh on bills, with the exception of salaries and pensions, which could be voted on by treasuries. The ceiling of Rs 1 lakh was placed due to the deteriorating financial situation. Treasuries passed bills dealing only with unrestricted wages and pensions in 2019, hampering the functioning of several local self-government bodies.

The 2016 white paper also spoke of the financial crisis, but the government failed to improve the situation in its first four years in office. The pandemic swept across the country in March 2020, shattering state finances. The income deficit increased by 60% to reach Rs 23,256 crore in 2020-2021, from Rs 14,495 crore in 2019-20.

Most of the rest of the states are in surplus because they use development loans and capital investment. Kerala, however, uses the loans for daily expenses and to fill the revenue gap. The state budget deficit in 2021-2021 was Rs 38,190 crore. Tax and non-tax revenues fell by 11 percent and 48 percent respectively during the year.

Outside the Kerala Treasury office

Outside the Kerala Treasury office. Photo file

The center keeps the treasury running
Grants from the central government ensured the functioning of the treasuries. Kerala received Rs 11,235 crore as grants from the Center in 2019-2020, which increased 176% to Rs 31,049 crore in the first wave of Covid in 2020-2021. Kerala has received a huge sum in the form of grants following the recommendations of the 15th Financial Commission that the state has gone bankrupt. GST compensation and subsidies (subsidies for deficit of revenue after devolution or PDRD subsidies, provided for in Article 275 of the Constitution to help States close the gap between the assessment of revenue and expenditure) on the basis of the commission’s recommendations have helped Kerala maintain its cash flow and functioning.

The 15th Financial Commission, which examined the financial condition of all Indian states, found West Bengal’s financial health to be the worst. Kerala was listed next to Bengal. The Commission allocated Rs 37,814 crore as an income deficit subsidy, preventing Kerala’s economy from collapsing.

It is undesirable to raise taxes during the COVID-induced recession to increase income. Better to avoid follies, extra expenses, unnecessary posts and establishments to save the available finances.

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