Sitting on a debt mountain, Kerala is facing an uphill challenge of meeting the extended deadline of 2017-18 for wiping out the revenue deficit.

This leaves Chief Minister Oommen Chandy (in the absence of a designated Finance Minister after KM Mani resigned following the bar bribery scam) with no option other than mobilising more of own resources when he presents the State budget for 2016-17 here on Friday.

Public debt Lacklustre performance of alternating LDF and UDF governments in the State has led to a spiralling of public debt, observes Jose Sebastian, public finance expert and faculty at the Gulati Institute of Finance and Taxation.

The previous LDF rule had left behind a baggage of ₹45,929 crore. The estimated debt as on March 31, 2016, at the end of the current UDF regime is ₹1,53,759 crore.

This means an addition of ₹1,07,830 crore in additional debt during the last 10-year period. This is alarming; the fiscal challenge facing the state is huge.

Meanwhile, the 14th Finance Commission has postponed Kerala’s deadline for wiping out revenue deficit from 2014-15 to 2017-18. To help the state to achieve this objective, it has sanctioned ₹9,650 crores as deficit grant, Sebastian recalled.

Falling prices But this is easier said than done. With rubber prices falling and foreign remittances likely to take a cue from sliding oil prices, the prospect of commodity tax collections becoming buoyant is remote.

If the Goods and Services Tax (GST) were to be implemented, Kerala might be able to mop up an additional revenue of ₹3000 crore. But the uncertainty over GST continues.

The government is facing a dilemma. It cannot reduce expenditures, the bulk of which is in the form of committed expenditures.

“Whoever is in charge of the 2016-17 budget would have to concentrate more on direct taxes such as land revenue motor vehicle tax, stamps and registration,” Sebastian said.

Huge subsidies flowing to the middle classes in the health and education sectors will have to be rationalised and targeted at the really deserving sections.

Constant mismatch The problem with Kerala finances has always been the mismatch between revenue and expenditure. Ever since 1983-84, revenue deficit has been increasing.

During the previous LDF rule, the total revenue covered 79.13 per cent of total expenditure. During the last five years, this has come down to 76.81 per cent.

During both periods, revenue expenditure, i.e. salary and pension expenditure, debt servicing, and the expenditure towards maintenance of current assets, accounted to more than 90 per cent.

This meant that capital expenditure, i.e. the expenditure towards new asset creation, has been limited to just around 10 per cent.

There is also marked difference in the annual average rate of growth under both dispensations.

While revenue expenditure grew at an annual average rate of 13.96 per cent during the LDF rule, the growth during the present UDF government is 19.93 per cent.

Capital expenditure On the other hand, capital expenditure grew at the rate 33.15 per cent on an average during the LDF rule whereas this is confined to 21.79 per cent during the current regime. In the last 10 years, the State has created massive physical infrastructure in the form of buildings and roads. These will have to be maintained.

Likewise, universities and centres of higher learning set up during the last 10 years will have to be funded. This, even as there is a thin spread of resources across schemes and projects, which calls into question the efficiency in public expenditure.

According to Sebastian, the real challenge facing the state is the alarming rate at which inequality is increasing. Progressive redistribution of resources alone can help buck this trend.

But he lamented that successive governments have been shying away from dealing with this important task admittedly due to paucity of resources.

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