The precarious nature of Kerala’s finances leaves the government with few options other than thinking fresh and acting bold on policy matters.

But the response of the political administration in the run-up to the next State budget is hardly inspiring, says Jose Sebastian, faculty at the Gulati Institute of Finance and Taxation.

Interest groups

“One merely needs to track talk shops masquerading as pre-budget consultations at various city centres with specific interest groups,” he told Business Line . The groups employ their lobbying power to make invited presentations and present individual cases for doles/concessions.

These are intended for benefit of the classes and not the masses, Sebastian said. Not surprising either, since these privileged classes cannot be expected to speak on behalf of the masses.

He faulted the political class for shying away from discussing ‘unpleasant things’ about the perennially debt-stressed economy, with direct implications for the masses. Nobody is willing to talk about them for fear of alienating the masses and being voted out the next time.

“It is not as if the politicians do not realise the dangers of delaying. They are just buying time. When the inevitable strikes, it would be too late to act,” he said.

Drastic change

Sebastian recalled that over the last 50 years, the State’s revenue structure has undergone a drastic change wherein the share of direct taxes and non-tax revenue has sharply decreased.

Politicians do no generally like tinkering with direct taxes for raising revenue since they would be held answerable for its spending (or the lack of it, as is mostly the case now).

But they are only too willing to jack up indirect taxes which just get embedded into the purchase price of consumables.

The consumer who parts with money here conveniently forgets the nature of the impost as he relishes the coveted acquisition. Nor would he bother himself about how the tax thus collected is spent.

Fiscal illusion

Since the tax is fixed as a percentage of the purchase price, the revenue from this source gets a boost each time the price is revised. The flip side is that this tends to give the impression that services delivered by the government (health, education etc) would also come free for ever.

This state of mind is called fiscal illusion, a typical affliction found to hamper economies that thrive mostly on indirect taxes for revenue, says Sebastian.

It hurts the economy this way - when revenues are not completely transparent or are not fully perceived by taxpayers, then the cost of government is seen to be less expensive than it actually is.

Since some or all taxpayers benefit from government spending from these unobserved or hidden revenues, the public’s appetite for such spending increases.

Kerala seems to have fallen into this trap and this explains its current plight when it has to borrow heavily from the market every month to run a swollen economy.

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