Kerala is plagued by chronic revenue deficits since the mid-1980s and its proportion to Gross State Domestic Product (GSDP) rose to as high as 5 percent in the beginning years of 2000s.The State did embark on the path of fiscal consolidation later during the latter half of the 2000s and Own Tax Revenue grew by 17.40 percent as against the all States' average of 16.94 percent. Later, it fell to 13.91 percent as against all States' average of 16.54 percent, while revenue expenditure grew by 20.70 percent as against all States' average of 14.54 percent. Central devolution to Kerala is lesser than all States' average, as share of tax devolution is positively related to lower per capita income and Kerala is a high per capita income State.
The slower rate of growth of own revenue with revenue expenditure growing faster resulted in a revenue deficit which exceeded 2 percent of the GSDP and about two thirds of the interest bearing debt being utilised to meet revenue expenditure. Revenue component of total expenditure in Kerala exceeds 90 percent. Kerala's spending on capital outlay is on an average 1.1 percent of GSDP as against all States' average of 2.4 percent.
Given these broad and ominous indicators, it is prohesised that we are in a fiscal brink. The spectre of implementation of pay revision based on State Pay Commission recommendations and UGC scales consequent to impending Central Pay Commission is haunting the fiscal horizon. In the division of powers under the Indian Constitution, the States have a major responsibility in social sector spending like education and health and these are personnel oriented where wages and salaries component is predominant. Kerala's spending on General Services (administrative services, interest payments and Pension) and Health Sector is above all States average. In a society where, human development indicators have been achieved through sustained state intervention and public action, it would not be sensible to suggest an across the board cut in expenditure to balance the revenue account, though a careful optimisation of expenditure should be a priority.
Studies by many researchers have shown that the own tax revenue potential of Kerala is not being tapped fully and by conservative estimates, the actual collection is 30 percent below potential for commodity taxes. As a State which tops in consumption expenditure, own tax-GSDP ratio should have been at least 10 percent of GSDP instead of 8.1 percent. Our own tax effort is presently below that of Karnataka and Tamil Nadu, which have lesser consumer spending. Recently, there is a slowdown in remittances, which can affect our tax potential in immediate future. It is here that innovative domestic policies aiming at higher economic growth based on own production base is called for.
Inspite of impediments, Kerala's fisc can come back to rails from the brink, if given the attention it deserves.
