The fag end of the financial year has always been testing times for finance ministers whether in states or the Centre. This is all the more true of FMs in Kerala, a state perennially facing fiscal stress.
On the one hand, he has to keep the people of the state who are long accustomed to ‘free lunches’ in good humour. This requires new promises and projects. On the other, he has to perform the unpleasant task of mobilizing public resources. We have never allowed him or her the luxury of telling the plain truth that the government is nothing but an entity financed by the contribution of the people!
This year’s budget is going to be presented in the backdrop of devastating floods of August 2018. The state is in need of huge resources for reconstruction. Constraints for external resource mobilization are too well known to be reiterated. The only way out is public resource mobilization from within the state. But all will agree that an election year is not the apt time for it. Finance Minister Thomas Isaac should have administered bitter pills in the last three budgets and kept the last three for sweet ones.
Unfortunately he banked too much on the revenue productivity of Goods and Services Tax though he was sufficiently warned against it. The unfortunate part is that he is still optimistic about GST bailing out the state.
It is not that the state lacks fiscal potential. The fact, on the contrary, is that the state has huge untapped fiscal potential. A recent study undertaken at Gulati Institute of Finance and Taxation underlined it.
While Kerala’ share in total public resources mobilised by all states in India was 4.45 per cent during the first 10 years of the formation of the state (1957-58 to 1966-67), it was just 4.50 per cent during the last 10 years (2007-08 to 2016-17) - marginal increase of 0.05 per cent in a state which experienced a consumption revolution due to Gulf remittances. The coalition politics the state has been carrying with it has to be squarely blamed for it.
With the introduction of GST, tax rates have come down. The check-posts have been completed removed thereby exposing the state to high tax evasion. Promises of GST about technology arresting tax evasion have not come. But now the very revenue structure of the state is emerging as a major constraint on aggressive resource mobilization strategy.
Of the total own resources mobilized by the state in 2016-17, 34.46 per cent is accounted by liquor and lottery. It is a widely known fact that the major consumers of liquor and lottery are the poor and marginalized. These are sections with high marginal propensity to consume. When purchasing power is siphoned off from the section of the people with high propensity to consume, it can only contribute to sluggishness in the trade sector which is already hit by demonetisation and floods.
And where does this money go? To the pockets of the salaried class and pensioners whose propensity to consume is low. This shows that the very strategy of public resource mobilisation in the state is flawed.
It is high time the state stopped its over-dependence on indirect taxes. The state has to mobilize more resources from direct taxes and non-tax revenue sources. There is in fact huge potential for both.
Take the case of property tax. No other Indian state has as much residential and commercial buildings as that of Kerala. Bulk of the foreign remittances has been invested in properties. The state has assigned property tax to local governments.
A study undertaken by Gulati Institute of Finance and Taxation for the Fifth State Finance Commission brought out the huge inefficiency of local governments in tapping the potential of this revenue source. By taking over the property tax from the local governments through tax rental arrangements, it is possible for the state to exploit this untapped potential. Let us hope the Finance Minister takes some steps in this direction.
There is some scope for additional resource mobilization by levying appropriate user charges on services provided by the state in health and education sectors.
In fact the state used to mobilize nearly 5 per cent of the revenue expenditure in these sectors in the form of user charges. Now it has come down to less than 2 per cent. It is possible to revise the fee in professional colleges without burdening the poorer sections. There is no reason why the Finance Minister does not think in this direction now.
On the expenditure side, there is a strong case for providing subsidized credit to lower income sections to start self-employment micro ventures in agriculture, animal husbandry and fisheries. This can give a big boost to local economies and in turn to the tax revenue of the state.
(The author is Senior faculty, Gulati Institute of Finance and Taxation. Views expressed are personal)
