Dr Thomas Isaac managed the state’s finances very well during the previous term and is without doubt the best Finance Minister Kerala has seen. However, the current dynamics of Kerala economy is perhaps totally different from what he dealt with in his earlier stint. This is not because of the messed up finances but because of factors such as the potential employment crisis in the oil economies of the Middle East and the unprecedented crisis in the plantation sector. These two have limited the options available for Dr Isaac this time and hence the government should take all possible steps to increase GDP growth rate to increase tax revenues.
It is almost impossible to moderate SIP (salaries, interest and pension) and also to grow tax collection by 25 per cent every year as mentioned in the white paper on the state’s finances the government has just released. Tax collection can for sure improve in the first few years, thanks to the lax and inefficient tax administration in the recent past. However, it will be difficult to expect the same rate of growth unless economic growth rate increases substantially.
Dr Isaac will find it difficult to approach the capital market for raising funds in a big way with the current state of finances, and the only saving grace will be the team of Dr Isaac and additional chief secretary (finance) Dr KM Abraham that is now managing the state’s finances. The government will have to explore innovative tax proposals without hurting the common man. One proposal will be to increase tax on agricultural land kept without cultivation which amounts to hoarding of land, a precious natural resource.
A step in this direction will either raise the area under cultivation leading to an increase in agricultural production or raise tax collection that will eventually result in moderating the price of agricultural land. This will also help moderate the prices of various agricultural products. An incremental increase in tax revenue will help the government put in an efficient subsidy mechanism for the farmer.
Unused urban land should also attract higher tax rates which will moderate the price of urban land, making it affordable for the middle class who want to have a house or an apartment. At present, 50 per cent or more of the price of an apartment in the urban area is on account of land price. An ordinary government employee (with relatively higher salaries) can never think of buying an apartment in main cities in Kerala due to high land prices. Recently, after the economic crisis, Saudi Arabia decided to impose a 2.5 per cent tax on the market value of unused urban land every year which is a very positive move that could make land/apartments affordable to common man. At least the rent will come down drastically as more people will develop land.
Cities such as Kochi have a lot of uninhabited apartments and villas which should also be taxed if not rented out. This should also push down the rent, making housing affordable to common man. Such taxation measures will only hurt the rich and not the common man and hence must be progressively explored to raise revenues.
The government should aggressively look at the public-private partnership model for big ticket long-gestation period infrastructural projects such as airports in the first few years. Once the finances are shaped well, it can then approach the capital markets to fund future capital expenditure. The media and opposition must work effectively to monitor budget Vs its achievements every six months and that must be the true finance event of the state, and not the budget itself.
The white paper has the most important statement, “Unfortunately budgets have lost their sanctity and budget speeches have become exercises in conjuring up unachievable visions of schemes and projects” which has been true of central and state budgets of late. Having authored these lines, Dr Isaac has an additional responsibility that the numbers are sacrosanct. And the media and the opposition should ensure that he is audited on the basis of his ability to meet the targets.
(The writer is the managing director, Geojit BNP Paribas)
