Non-priority spending has deepened Kerala’s fiscal stress

A CAG report on state finances released in July 2022 reveals that the total outstanding liabilities (debt) of Kerala grew to Rs 3.08 lakh crore in 2020-21. (Source: PTI/File)

In a day or two, police patrolling and crime investigation at distant places will be halted in Kerala, as fuel stations have rationed fuel supply for police vehicles citing pending overdue bills. Media reports claim that the police department has to clear Rs 1 crore of dues to the fuel companies, and the state police chief has written to the finance minister requesting the allotment of the amount. Confirming the crisis, a senior police official in Ernakulam, the commercial capital of Kerala, told me that he hired an Uber car for official use. He even said in a day or two, he won't be surprised if patrolling gets halted in the state.

In March 2022, upon the government's instructions, the Kerala police chief told the force to control fuel expenses citing the state's financial crisis. In 2022, if the police had adopted austerity measures, now, fuel denial due to uncleared bills forced them to ground the vehicles. Interestingly, on the same day when police officials are hiring Uber for official use, Kerala Youth Affairs Commission chairman Chintha Jerome was in the news for a hike in salary. Chintha's posting is a political appointment. Interestingly, such postings and spending are one of the main reasons leading the state to the debt trap. Or in other words, non-prioritised spending has led to the crisis.

Non-Priority Spending

During its previous term and now, the Communist Party of India (Marxist)-led Pinarayi Vijayan government had thrown away money without caution. Yes, floods in 2018 and 2019 and Covid-19 in 2020 and 2021 have worsened the financial situation. But the Left government has never thought of controlling the fund leak. While the previous CPM-led Pinarayi government between 2016-2021 had 20 ministers, and this ministry has 21 ministers. In addition to having an extra minister, the government has some 500 personal staff members. Every minister gets around 25 personal staff members. And this is when a central government minister gets only 15.

Currently, Pinarayi leads with 33 personal staff members, followed by his son-in-law PA Mohammed Riyas, the PWD minister, and Abdu Rehman, the ports minister, who both have 28 each. State transport minister Antony Raju has the least with 19 members.

And all personal staff members are appointed politically. A personal staff member who gets an appointment at the age of 18 years will work for 2.5 years and then retire. He will get a salary for those 2.5 years and a pension of Rs 3,350 till death. Additionally, he is eligible for a 7 percent dearness allowance and gratuity.

The state has around 1,300 retired personal staff members. And annually, some Rs 8 crore are spent on pensions for these retirees. Kerala governor Arif Mohammed Khan was 'angry' with the state government for spending money for retried personal staff members. And his statements had hit media headlines for weeks.

The governor's statements 'told' the public that the state government is spending crores for politically appointed personal staff members when some 35 lakh job seekers have registered in the Kerala employment exchange and waiting for a job call. If personal staff members' salary and pension are one example to be quoted to show how money is thrown away without setting any spending prioritization, a couple of recent spending by Pinarayi will surprise anyone. He bought cars for Rs 2.5 crore for himself and the governor during the last few months and built a lift for Rs 25 lakhs to go to the second floor of his two-storey official residence. And on the same official premises, he spent Rs 42.90 lakh to reconstruct a damaged compound wall and build a cattle shed, and Rs 25 lakh to renovate a swimming pool.

This non-prioritised spending happens when some Rs 5,000 crore is taken as a loan each month from the central government to pay the salary and pension of government employees in the state.

No Money For Development

According to Kerala Budget 2022-23 document, the state is estimated to spend Rs 94,781 crore on committed expenditure items, which is 71 percent of its revenue receipts.

This comprises spending on salaries (31.3 percent of revenue receipts), pension (20.0 percent), and interest payments (19.4 percent). In other words, the government has only 29 percent of revenue left for other welfare programs and invest in revenue-generating developmental projects. The budget document also reveals that committed expenditure in 2022-23 is estimated to increase by 2 percent over the revised estimate of 2021-22. And spending on interest is estimated to increase by 17 percent.

A CAG report on state finances released in July 2022 reveals that the total outstanding liabilities (debt) of Kerala grew from Rs 1.90 lakh crore in 2016- 17 to Rs 3.08 lakh crore in 2020-21. In 2020-21, the outstanding liabilities grew 16.21  percent over the previous year. It comprised internal debt of Rs 1,90 lakh crore (62 percent), public account liabilities of Rs 1.03 lakh crore (33 percent), and loans and advances from GoI of Rs 14,973.64 crore (five percent).

Off-Budget Borrowing Burden

And off-budget borrowing of Rs 9,273.24 crore is not included in the Rs 3.08 lakh, crore debt. These off-budget borrowings have increased the overall debt liabilities of Kerala by Rs 16,469.05 crore to Rs 3.25 lakh crore as on 31 March 2021. Meanwhile, in June 2022, citing the financial crisis in Sri Lanka, a team of Reserve Bank of India economists led by deputy governor Michael Debabrata Patra named Kerala, Bihar, Punjab, Rajasthan, and West Bengal as ‘highly stressed’ states.

The RBI report also adds that the debt to GSDP ratio is unlikely to see any significant decline anytime soon – the state has projected it to be 35.7 percent in 2024-25 in its medium-term fiscal policy and strategy statement. The RBI study has estimated it will be 38.2 percent in 2026-27.

The increase in the debt-GSDP ratio is not at all a good sign for the economy. Unfortunately, a recent report from RBI reveals that Kerala has lost its pole position in inward remittance to Maharashtra. According to the report, the share of inward remittances to Kerala from Non-Resident Keralites (NRK) has dwindled by half over the past five years. Going by the statistics in 2020- 21, Maharashtra has overtaken Kerala, which topped the list for the highest NRI remittances share in 2016-17. Five years ago, 19 percent of the total remittances were to Kerala. It has dwindled to 10.2 percent now. And Maharashtra’s total remittance, which was 16.7 percent then now has grown to 35.2 percent.

Economists say remittances increase the consumption level of rural households, which might have substantial multiplier effects because they are more likely to be spent on domestically produced goods. And it has happened in Kerala too. If Keralites enjoy better education facilities, health infrastructure, and decent living standards, then it is remittances that have made it possible. As remittances are witnessing a dip, financially stressed Kerala will face a tough time.

Meanwhile, Kerala Finance Minister KN Balagopal himself is giving signs of Kerala's unprecedented financial crisis. In the first half of December, while talking to the media, he expressed his worry over the financial crisis twice. Additionally, the Kerala cabinet has also decided to write to the central government seeking flexibility in taking loans and relaxations in assessing debts.

In October 2022, the Fitch Ratings revised the outlook on Kerala to negative from stable and affirmed the Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BB'.

When a negative outlook is forecast, only prudent debt management and radical steps to generate revenue will help Kerala to rescue itself from the trap.

Rejimon Kuttappan is an independent journalist and author of Undocumented-Penguin 2021. Views are personal, and do not represent the stand of this publication.