Kerala’s fiscal excesses are unforgivable

The fiscal crisis that has beset Kerala brings to mind Lenin’s maxim, “Debauch the currency and destroy capitalism!” That, of course, was said at a time when Europe was governed by hereditary rulers.

Had he lived in our age Lenin is more likely to have cautioned us with, “Wreck the treasury and debauch democracy.”

The link between meaningful democracy and strong public finances may not be obvious but it is vital. The political class may try to explain away its culpability by making out that a fiscal crisis only reflects their efforts to improve the quality of life of the governed. But actually it reflects its patronage of vested interests, pursuit of competitive populism, attachment to pet projects or just plain incompetence at managing monies placed in their trust.

An element of all of these underlies the current fiscal crisis in Kerala, and it is not the first time that the State has found itself in one. Surely there is nothing generic to Kerala that it must live under a perpetual fiscal cloud. It is moral hazard in political practice alone that has led the State down this path.

Fiscal constraints had existed even at the time of the formation of Kerala in the 1950s. In an interview with this author, VR Krishna Iyer, who had served in the historic communist ministry elected to govern in 1957, recalled that the government then had to make do with whatever little funds it could find. In retrospect, one is filled with admiration at how much the EMS Namboodiripad ministry managed to achieve with respect to public provisioning in the health and education sectors on so slender a resource base.

Both Namboodiripad and Achutha Menon who had followed him were devoid of sentimentality when it came to governance. They were conscious of being there to implement a democratic project and that they could ill afford to allow weak public finances to wreck it. Succeeding politicians in Kerala show no such awareness, which explains why the State finds itself in the present predicament. Governments claiming allegiance to ideologies of the left or the right have come and gone leaving only a mounting debt for future generations to repay. Kerala has been categorised as “debt stressed” by the Centre.

Around Onam time this year, the Kerala government signalled that its finances were under severe pressure. Austerity was announced, a hold on appointments in the public sector was ordered and a hasty revision of the rates on public services was effected.

By then it was public knowledge that the government had sought, and received, an overdraft from the RBI. Next, the media reported that Plan spending was to be curtailed. The last is unsurprising in such a situation but it should be of concern in Kerala where public capital formation is particularly low already.

The Left Front, currently in the opposition, saw this as an opportunity to embarrass the United Front government, currently in power, by demanding a White Paper on the state of the public finances. The government has refused to issue one. This is an inappropriate response for two reasons. First, in a democracy, citizens have a right to know the exact state of the finances they have entrusted to their government. Second, the first thing that the UDF had done when it came to power in 2012 was to issue a White Paper on finances. In retrospect it becomes clear that this had been done with the express purpose of embarrassing their political rivals, who too had done nothing to improve the State’s finances.

The recurring fiscal crisis is a case of economics trumping politics. Historically, both the political fronts in the State indulge in cynical manoeuvres to remain in power. Little distinguishes the State’s political parties except their symbols at election time. An emptying treasury is the collateral damage.

The Malayali public understand this and have, for over three decades, voted out of office each of two fronts at the end of their term. Even if they are not aware that Kerala has the lowest tax-GDP share among the southern States, they can see that fiscal crisis does not periodically visit the neighbouring States.

Vested interests, competitive populism, pet projects and sheer incompetence as factors that have contributed to Kerala’s perennial fiscal crisis. Vested interests in Kerala contribute in two ways. There are commercial vested interests in agriculture, trade, real estate and education directly represented by specific political parties and a corporatised media.

This ensures the former concessions and low taxes, with implications for the fisc.

The other block of vested interests are the public sector employees, both managers and workers, extending to the general administration. This section happens to be paid without any reference to either their productivity or the financial condition of the government. To the extent that the general administration is overstaffed, it lowers overall productivity by getting in the way of efficiency.

On the other hand, the agencies responsible for public services are understaffed, and to the extent they provide producer services, this lowers output. When output is negatively affected it lowers public revenues as most taxes are levied ad valorem .

As for pet projects, while there are many, the most noteworthy being the new public universities. Over the past decade both the political fronts have gone on a spree opening single-subject universities. Even the kalaris of medieval Kerala were more diversified in their offering.

Apart from requiring that large tracts of land be acquired at market rates to house these projects, they merely add to the fixed cost being incurred by the existing public universities. The responsibility of Kerala’s political class in bringing about the present fiscal crisis is total. From the late seventies on there has been no serious initiative to grow the economy.

Fees and rates are raised reluctantly, if at all. An arrangement whereby the government indexes its payments to the inflation rate but is reluctant to index its receivables accordingly is unsustainable.

In a democracy it is the duty of those in public life to not only explain this to their constituencies but to do whatever it takes to ensure the robustness of the public finances. With the ongoing fiscal crisis Kerala’s political class has failed this test.

The writer is a professor at the Centre for Development Studies, Thiruvananthapuram