Ockhi Cyclone of 2017, the unprecedented floods of 2018, and the Centre’s “fiscal intransigence” have all combined to accentuate the stress in Kerala’s finances.

The Economic Review 2018 presented in the State Assembly on Wednesday on the eve of the 2018-19 State Budget, said the ‘theme chapter’ is about building a new Kerala in the aftermath of last year’s devastating floods. The government has taken this crisis as a challenge and laid out a vision for a more climate-resilient and progressive State. But there is no denying that the full impact of floods and landslides on economic growth will be revealed only in coming months.

State finances, which had been witnessing a slowdown in the growth rate of own tax revenue (OTR), was expected to enter a phase of consolidation. But the unexpected policy shocks and natural disasters have delayed this. Flood relief and rehabilitation would result in additional revenue expenditure burden in the coming financial years from 2018-19, the Economic Review said.

Renewed efforts for fiscal consolidation through higher mobilisation of OTR have been hit by policy measures beyond its control, such as demonetisation, non-revenue neutral rate apportionment, and problems in Goods and Services Tax implementation.

Additional borrowing limits and grants have been requested and the GST Council has been approached for levy of GST cess for a limited period. Delay in acceding to these requests would adversely affect fiscal consolidation efforts.

Annual deficit targets

The recommended debt-GDP ratio of 20 per cent and fiscal deficit ratio of 1.7 per cent for states would impede Kerala’s development and capital expenditure plans. Fiscal consolidation is the aim in the medium run, but when rebuilding the State is the most important priority, annual deficit targets need to be relaxed at least for a year.

A major component of OTR is commodity taxes, that is, GST/Value Added Tax and sales tax on petroleum and alcohol. This comprised 78.75 per cent of OTR in 2017-18.

Though the growth rate of revenue from commodity taxes has gone up due to receipt of compensation, it is clear that for a top ranking consumer state such as Kerala, GST has not brought in the expected gains. This is mainly due to a fall in the rate at which most of the commodities are taxed, apportionment of tax rates unfavourable to states, complex return filing procedure, and doing away with check posts while delaying implementation of e-way bill.

Kerala is making conscious efforts to focus on a revenue-led fiscal consolidation without retreating from social and infrastructural spending that are essential for economic growth.

Borrowings and liabilities as a proportion of revenue receipts, an indicator of debt stress, has been coming down steadily from 2011-12 to 2018-19. This indicates a trend towards sustainability (ratio of interest payments to revenue receipts).