(The arguments in the White Paper presented by the Finance Minister K M Mani in the Assembly as marked yellow. The responses are made just below of each paragraph)
Options for the Government
71. In view of the stress on resources as elucidated in foregoing chapters, government has very little options for the management of its finances. Some possible options are briefly mentioned in succeeding paragraphs.
Para 71- The State Governments have “very little options for the management of (their) finances”. The trend for increased fiscal centralisation and the neo liberal fiscal reforms have reduced the states to the status of glorified municipalities. It is unfortunate that the White Paper refuses to examine the trends in Centre – State financial relations, despite its admission that the Central Transfers to the State have relatively declined.
72. Diversification from agriculture to industrial sector and expansion of tertiary sector is expected to add considerably to the gross domestic product. However, the Kerala economy has for long been dependent on the growth of service sector rather than the growth of agriculture and industrial sectors. The state is lagging behind in the agricultural and industrial sector even though fertile soil, suitable climate, skilled manpower and capital are in abundance. The productive sector is far behind the national trend. It is the high time to zero in on the factors responsible for this backwardness and rectify the mistakes without losing further time.
Para 73 -. We have to very carefully and critically examine the manufacturing policy of the India Government before adopting it for our state. For example, with the political consensus today in Kerala is for protection and expansion of the public sector in Kerala which definitely is not on the neo liberal agenda of the Central Government. It must also be taken into account that there has been significant unemployment in the state during the last five years as is proved by the following data taken the 66th round of NSS, even though unemployment still continues to be much higher than the national average. It also must be noted the demand for employment is for relatively better paying employment in service and new growth sectors.
The unemployment rate by usual status (principal) as share of the labour force.
National Sample survey, 2004-05, 61st round and 2009-10,66th round.
74. Industrial sector in the state needs rejuvenation. But it should not mean that such a rejuvenation would be only through the public sector undertakings. In addition to public sector, partnership of private sector is essential for major investments. The State should not shy away from private capital. But in order to facilitate extensive private investment, the state has to organize basic facilitating infrastructure. Accordingly, it seeks massive investment in infrastructure such as seaport, airports, roads and transportation sector. But the state having inherited massive committed liability, finds it difficult at this juncture to allocate sufficient funds for investments in infrastructure.
Para 74. Nobody would contest the importance of private investment. Then what is the need for the warning “But it should not mean that such a rejuvenation would be only through the public sector undertakings”. The success of LDF in rejuvenating the PSUs and making them profitable has contributed significantly improved the industrial investment climate in the country. The White Paper rightly knows the need for infrastructure investment, but moans “But the state having inherited massive committed liability, finds it difficult at this juncture to allocate sufficient funds for investments in infrastructure”. The so called massive committed liability the White Paper had argued earlier was incurred “irresponsibly” by granting administrative sanction for public works! The argument in this paragraph shows that the steps taken by the LDF government was in the right direction.
75. The state has to manage its finances in accordance with the targets set by the 13th Finance Commission in course of the larger macro economic management of the country. We are aware that confrontationist attitude with Centre will not be beneficial to the state economy. Further, fiscal consolidation in the state cannot be achieved by compressing the social sector expenditure and the expenditure on much needed public goods. Compression of expenditure has to be limited to those sectors where private investments are relatively easy to come by or where the investments will not fetch the desired results at this point of time. Augmentation of revenue alone cannot result in fiscal consolidation. In fact, economic tremors can occasionally pull down revenue in medium term. Hence the two pronged approach of revenue augmentation and avoiding wasteful or inefficient expenditure can lend credence to the fiscal consolidation efforts.
Para 75. It is good that the UDF has realised that the “fiscal consolidation in the state cannot be achieved “by compressing the social sector expenditure and the expenditure on much needed public goods” as it attempted to do during 2001-06 But the statement that “Compression of expenditure has to be limited to those sectors where private investments are relatively easy to come by” indicates that it is planning for massive privatisation in education and health sectors. We do not agree with this stance. Therefore our position is that the major focus of intervention should be on the revenue side. The State should ensure at least an annual growth of 20 percentage in revenues. With GST in the horizon, the buoyancy of the Tax revenues will definitely improve. The challenge is to consolidate the overhauling of tax administration that has been initiated by the LDF government. However the proposals in the finance bill points to the contrary.
76. Outstanding dues of all kinds will have to be cleared in a phased manner so that budgetary planning and MTFP targets are not vitiated.
Para 76 - This is simply an exaggeration. Clearing of outstanding dues is not going to derail the fiscal trajectory.
77 The Kerala Fiscal Reforms Act 2003 will have to be amended in compliance of the 13th Finance Commission recommendations so that the fiscal consolidation process are rolled on in the State and the benefits recommended in the 13th FC are availed as far as possible.
Para 77 - The Kerala Fiscal Reforms Act 2003 is the worst of its genre stipulating a fiscal deficit target of 2 percent. While amending the Act the ways must be explored as to how to increase the fiscal maneuver space for the state government. First, the fiscal consolidation path should be contingent upon an improved trajectory of fiscal transfers from the Centre. Second, we should also project a modified revenue deficit trajectory following closely the new concept introduced by the Union Finance Minister in the latest Union Budget. A clear modification required in Kerala is regarding the capital expenditure incurred by the LSGIs while calculating the revenue deficit. Similarly, expenditure in human capital particularly education must also be taken into consideration. While we also acknowledge the need for formally legislating a new Fiscal Reforms Act given the Federal frame work within which the state government operates, we want to make it clear the state government have to carefully explore every possibility of off – budget borrowing in order to improve our infrastructure spending.
78. Debt sustainability will have to be achieved through prudent financial interventions. The composition of debt has remained almost the same during the last five years. The internal debt as a percent of total debt stock is 63.46 per cent while the loan from the Centre is at 8.56 percent in 2011-12. PF, Small Savings etc constitute 28.28 percent of debt stock. The debt as a per centage of GSDP has come down to 28.99 in 2011-12 (Alt). The Debt/GSDP limit proposed by the 13th Finance Commission for 2011-12 is 32.3 percent. The FD/GSDP and RD/GSDP ratios allowed by the 13th Finance Commission for 2011-12 are 3.5 percent and 1.4 percent respectively. But in the year 2011-12, the RD/GSDP ratio is expected to be at an increased level of 1.81 per cent whereas FD/GSDP ratio will remain within the limit. It may be made clear that non achievement of RD/GSDP target is due to the provisioning for pay and pension revision arrears in 2011-12. The RD/FD ratio which was as high as 74.82 per cent has come down to 52.66 percent in 2011-12 (Alt.). Thus the RD/FD ratio shows that the quality of fiscal deficit has been improving.
Para 78- The observations in this paragraph based on time series data inclusive of the budget estimates of 2011-12 confirms our positions and rejects the general trend of arguments in the white paper: “Debt as a percentage of GSDP has come down” t to below the norms fixed by Finance Commission; “FD/GSDP target also will remain within limit” and RD/FD ratio shows “that the quality of fiscal deficit has been improving”. The RD/GSDP ratio will be above the Finance Commission norm “due to the provisioning for pay and pension revision arrears in 2011-12”. This also would fall in line in the subsequent years. Where is the crisis?
79. Government has already chalked out the Medium Term Fiscal Policy Plan for 2011-12 and 2012-13. The main objectives mentioned there are indicated below:-
• Inadequate infrastructure of international standard hinders Kerala’s image as an attractive investment destination. Given the resource constraints of Government, infrastructure will be built up with private participation. Major infrastructure projects will have to be put a fast track mode.
• Measures will have to be taken to focus Kerala as an attractive investment destination.
• Agriculture and industry will have to be the thrust areas for creating employment opportunities through diversification and resource /technical collaborations.
• Not only growth but also development with equity without sacrificing the interest of the poor has to be the prime concern.
Para 79. Regarding infrastructural investment, it should be noted that projects like upgradation of state high ways, major district roads, other district roads, village roads and government offices cannot be undertaken in PPP model. Having rejected the business model that we had proposed in the budget presented in March 2011, the Finance Minister should explain his alternative. As of now he has no alternative. We also would emphasis the importance of instituting a comprehensive social security program. Unfortunately the revised budget has rejected many of its components like Urban Employment Guarantee program, Income Support Program, Maternity Benefits for Women in the Unorganised Sector, Deposit for Higher Education for the new born and so on.
80. Sustained growth of the State’s own tax revenues is essential to reduce fiscal imbalances. Therefore tax administration has to be strengthened further and rationalised.
Para 80 - The Finance Minister has not touched upon important programs like corruption free check posts and has introduced modification to return filing and scrutiny that has already brought protest from the traders.
81. As against a legislative ceiling of A 14000 crore in respect of contingent liabilities, the outstanding liabilities are A 7495 crore. State will have to be careful and prudent in incurring further contingent liability.
Para 81 - Since the actual guarantees are only half the ceiling we should follow a bolder policy of utilising this instrument for stepping up investments. At any rate instead of the present ceiling in terms of absolute figure, it must be substituted by a ceiling of ratio of guarantees to GSDP.
82. It is obvious that the intricacies of finances of the state has to be understood properly and addressed. It cannot be done in a year or through a year’s budget. It has to follow a sustained train of efforts over next new years. Effort has to maximize its usage subject to the constraints of the economy. Management of revenue gap is never a one-step effort. It combines proverbial ‘tightening of the belt’ with increasing the economic efficiency of expenditure based on informed options of spending, without compromising on the social commitment and economic imperatives.
Para 82. If the above understanding had informed the analysis of those who had drafted the earlier sections, an unnecessary controversy could have been avoided. Obviously the various sections have been drafted by different persons and their drafts have been put together without the proper integration just like the present coalition government. The Finance Minister’s coloured thinking has clouded the analysis. His true instincts also come out in the reference to proverbial “tightening of the belt” so much reminiscent of the “tightening of the dhotis” call given while introducing the White Paper of the last UDF government. Memories are often short. The UDF government may well refresh their memories as to how the people of Kerala responded to their last White Paper and actions taken thereon.