(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)
Introduction
Introduction
PART – I
ANALYSIS OF BROAD INDICATORS OF STATE FINANCES
5. To understand and appreciate the finances of the State, certain basic indicators have to be taken into account. Gross State Domestic Product (GSDP) and its sectoral composition, fiscal deficit, revenue deficit, capital and revenue expenditure, debts, etc are a few of these indicators. This paper discusses them in seriatum.
Para 5. The Finance Minister has deliberately falsified data. The conclusions drawn reveal economic illiteracy and petty political motive.
6. Gross State Domestic Product (GSDP) signifies the sum total of the value of economic activities in the State. A rising GSDP indicates vibrancy of the economy. A steady or ascending growth rate of GSDP underlines the growth of economy over a period of time. If we look at the data on Gross State Domestic Product (GSDP) during the last few years, it has some interesting lessons. During the UDF rule, we had highest growth of GSDP at 23.34% in 2004-05. Prior to that, during 2002-03 and 2003-04, it was 11.51% and 11.28%. In 2005-06, it was 14.74%. Even this figure was never achieved by the previous Government in subsequent five years, as the table T1 reveals. At the current prices, the GSDP stands at A 230316 crore (2009-10) which signifies a growth of 14.57% over the last year.
Para 6. The data presented in T1 consists of two time series data with base year 1999-2000 for the years 2000-01 to 2003-04 and base year 2004-05 for the years 2004-05 to 2009-10. Anyone who has done elementary study of National Income Accounts and practices in India would know that we cannot mechanically join two time series data with different base years. They have to be spliced together by calculating conversion factor from the year for which common data is available from both the series.
In table AT1A, we have produce time series data with base year 2004-05 and in table AT1B, time series data with base year 1999-2000. The compound growth rate for the UDF period is only 11.3 and the LDF period is 13.9. In contrast by falsifying data the White Paper reaches what it calls “some interesting results”. The conclusion reached that UDF period recorded the highest growth of GSDP in Kerala history by achieving 23.34 percent growth in 2004-05. True, it declined to 14.74 percent in 2005-06, “Even this figure was never achieved by the previous Government in subsequent five years, as the table T1 reveals”. The Finance Minister should withdraw the White Paper and apologize to the Legislative Assembly for doctoring data. We do not think that this was an accidental mistake because the time series published by his own Finance Department as well as planning board is different from the data in table T1. The Economic Review 2007 in table 3.7 gives the growth rate for 2004-05 as 14.
Table AT1
AT1(A)
Year | GSDP (current) | Growth | Year | GSDP (current) | Growth | |||
Base=2004-05 | Base=1999-2000 | |||||||
2000-01 | 78592 | - | 2000-01 | 72659 | - | |||
2001-02 | 84287 | 7.2 | 2001-02 | 77924 | 7.2 | |||
2002-03 | 93991 | 11.5 | 2002-03 | 86895 | 11.5 | |||
2003-04 | 104595 | 11.3 | 2003-04 | 96698 | 11.3 | |||
2004-05 | 119264 | 14 | 2004-05 | 110260 | 14 | |||
2005-06 | 136842 | 14.7 | 2005-06 | 126511 | 14.7 | |||
2006-07 | 153785 | 12.4 | 2006-07 | 142175 | 12.4 | |||
2007-08 | 175141 | 13.9 | 2007-08 | 161918 | 13.9 | |||
2008-09 | 201020 | 14.8 | 2008-09 | 185844 | 14.8 | |||
2009-10 | 230316 | 14.6 | 2009-10 | 212928 | 14.6 | |||
UDF | 2001-02 to 2005-06 | 11.8 | UDF | 2001-02 to 2005-06 | 11.8 | |||
LDF | 2006-07 to 2009-10 | 13.9 | LDF | 2006-07 to 2009-10 | 13.9 | |||
It is also surprising to note that the white paper on state finances report the growth rate in nominal terms and compare the data for 10 long years. The actual gsdp growth rate is much higher in recent years, if one looks at in real term. It is also to be noted that kerala has become one of the fastest growing state in the Country.
It is not our intention to periodise economic growth according to five year terms of the state governments. Such analysis lacks any coherent economic backing. Economic growth is governed by factors that go beyond the five year tenure of governments. On the other hand the fiscal indicator of government is directly influenced by the policies of the government in power. The White Paper has refused to compare the fiscal indicators of UDF and LDF periods because the UDF government will be shown in poor light. This kind of exercises of manipulating data may be common in political statements but it is a bad comment on the professionalism in Finance Department when they are flaunted in an official White Paper.
Let us make our position clear. The Kerala economy has entered a new phase of accelerated growth since late 1980s, say, 1987. The Kerala economy has continued to grow at a faster rate than the national average. It is likely, if we pursue appropriate policies, Kerala may well become the fastest growing state economy in India. It is our criticism that the fiscal conservatism of the UDF government will undermine such a potential.
7. GSDP is contributed by all the sectors of the occupational structure. Going by the composition, the primary, the secondary and the tertiary sector constituted 15.36%, 23.14% and 61.50% of the GSDP respectively in 2009-10. A further analysis of primary sector indicates that the agriculture and allied sectors’ contribution to the GSDP had declined from 12.68% in 2007-08 to 12.14% in 2008-09 and later 11.47% in 2009-10. Similarly, the analysis of secondary sector reveals that within it, the construction activities alone constituted 12.21% and the manufacturing activities 9.33% of the GSDP in 2009-10. On the same lines, an analysis of the tertiary sector reveals that ‘trade, hotel and restaurants’ constituted 21.14% and ‘transport, storage and communication 9.40% of the GSDP. Transport by other means contributed 7.13% to the GSDP. Going by the trend, one can hypothesize that these are the areas which can ensure better revenue receipts and also point out potential areas for policy intervention in the medium term.
Para 7 - The politically coloured analysis of GSDP continues in para 7. The decline in the share of agriculture and allied sectors has been historically a long standing trend. But the White Paper focuses on the decline since 2007-08 as if it is a trend initiated under the LDF government. This is true for the comments on secondary and tertiary sectors.
8. Slow economic growth leads to lower levels of investment in both public and private ventures. This in turn retards the pace of economic growth! With one succeeding into the other, it becomes a vicious cycle, adversely impacting the revenue generation, thus starving the economy of funds for economic and social development. If this is appreciated properly for evaluation of development alternatives, it may offer better options for management of available financial resources, keeping in view the contemporary development requirements. In this backdrop, optimizing the resources for the achievement of development objectives appears to be the only way to address the issues facing our State’s economy at the moment. Of course, while proceeding on these lines, one has to remember that ordinarily, increase in resources becomes difficult as one scales the higher targets.
Para 8 - Examining the trend in State Revenue and growth in GSDP, we feel that Kerala is moving from a “vicious cycle” of growth to a “virtuous cycle” of growth. No doubt there is always scope for better management of the available financial resources but this should not become a cover for fiscal conservatism.
Revenue Receipts.
Table AT2
The structure of Revenue Receipts
Year | Taxes and duties as share of total RR | Share of central taxes as share of total RR | State taxes and duties as share of total RR | NTR as share of total RR |
2001-02 | 83.23 | 17.82 | 65.41 | 16.77 |
2002-03 | 84.77 | 16.12 | 68.65 | 15.23 |
2003-04 | 85.49 | 17.03 | 68.46 | 14.51 |
2004-05 | 84.21 | 17.81 | 66.4 | 15.79 |
2005-06 | 80.4 | 16.46 | 63.94 | 19.6 |
2006-07 | 83.32 | 17.66 | 65.66 | 16.68 |
2007-08 | 83.96 | 19.2 | 64.76 | 16.04 |
2008-09 | 82.68 | 17.44 | 65.23 | 17.32 |
2009-10 | 84.35 | 16.85 | 67.5 | 15.65 |
UDF average | 83.6 | 17 | 66.2 | 16.4 |
LDF average | 83.6 | 17.8 | 65.8 | 16.4 |
Source: Table T2
9. An analysis of the trend in revenue receipts Table T2 discloses that share of taxes and duties has been between 80.41% in 2005-06 and 84.35% in 2009-10 (This is lesser than 85.49% in 2003-04, the highest in last 10 years). States’ own taxes and duties have been between 66.40% in 2004-05 and 68.65% in 2002-03. It has hovered between 64.76% (in 2007-08) and 67.50% (in 2009-10).
Para 9 - The analysis of changing share of different components of revenue is silly and meaningless. This “analysis” is included because it facilitates spurious conclusion of better tax collection performances during the UDF period. The profound analysis forgets that we are discussing share of different items of the total revenue and if there is an increase in the share of any particular component share of some other item should decline. It does not give any idea about the change in the growth pattern in revenues. One of the major reasons why there has been some decline in the share of taxes is the increase in non-tax revenues of the state..
Having stated our position we want to make clear that point to point comparison of any particular year during the UDF period being the highest and so on are untenable. In table AT3 we have summarized the relevant data from table T2 regarding the different components of the revenue receipts. It clearly shows that there has not been any change in the structure of revenues of the State Government between the UDF and LDF periods.
State’s own Revenue
Table - AT 3
Trend in Revenue Receipts
Year | State OTR | State's own NTR | State's own revenue | Share of central taxes and grants | Total revenue |
2001-02 | 0.91 | -17.56 | -0.96 | 17.63 | 3.73 |
2002-03 | 23.28 | 25.37 | 23.46 | 2.47 | 17.46 |
2003-04 | 10.77 | 18.45 | 11.42 | 10.03 | 11.07 |
2004-05 | 10.82 | 1.5 | 9.97 | 27.34 | 14.26 |
2005-06 | 9.1 | 14.37 | 9.54 | 23.14 | 13.29 |
2006-07 | 22.11 | 0.09 | 20.18 | 15.93 | 18.91 |
2007-08 | 14.46 | 29.01 | 15.52 | 17.35 | 16.06 |
2008-09 | 16.98 | 28.92 | 17.95 | 11.79 | 16.13 |
2009-10 | 10.22 | 18.78 | 10.98 | -4.74 | 6.52 |
2010-11 RE | 24.38 | 20.72 | 24.04 | 20.16 | 23.05 |
UDF average | 14.3 | 14 | 14.2 | 14.1 | 14 |
LDF average | 17.6 | 19.5 | 17.7 | 12.1 | 16.1 |
10. Within the States’ own tax receipts, the contribution of sales tax and VAT had been between 68.56% and 72.46% during the last five years. It may be recalled that the UDF Government had in 2001-06 been able to raise this share to 74.76% in 2004-05 and 74.07% in 2003-04. Similar is the example of Motor Vehicle tax in which the growth rate hovered between 5.86% and 6.43% during the last five years. One may recollect that the previous UDF Government in 2001-06 had been able to achieve the growth 7.24% in 2003-04 and 6.81% in 2004-05.
Para 10 - The objective of this paragraph is to trivialize the acceleration in the growth of state revenues that has taken place during the last 5 years. Definitely the VAT system has contributed to the tax growth. There is no appreciation of the total overhaul of the tax administration that has been carried out in the last five years in order to fully tap the potential of VAT. Further the non VAT tax components has also shown definite upward trend at around 20 percent. What is disconcerting in the conclusion drawn from the data is the pessimism regarding keeping up the revenue buoyancy. The expenditure review committee report for the year 2009-10 has surveyed the major tax commodity groups and has pointed out the considerable tax evasion that still persists and the slack that can be easily tapped given the newly created data base of the Tax Department and reforms in administration. Major proposals of non tax revenue like collection of tax from dams, fees for regularizing revenue deposit in the pre 2000 period and so on are yet to be implemented effectively. Sufficient experience has been gained to enhance the non tax revenue in a systematic manner. Besides, the introduction of GST is going to be a definite boost to the tax buoyancy.
Share of Central Taxes and Duties.
12. Share of central taxes had substantially increased in 2004-05 and 2005-06 at the rate of 27.34% and 23.14% respectively. This was on account of the 12th Finance Commission’s recommendations and consequent upon the expansion of divisible pool of funds, the State stood to gain. However, the central share of taxes in 2008-09 and 2009-10 and also the following year declined, arguably due to the economic slow down which picked up in the year 2010-11 and the growth rate became 20.36% that year against (-) 4.74% in 2009-2010. Similarly, the total transfers to the State during the last 5 years have generally growing been in the range of 11 to 17% of its revenues as the Table T3 .. explains. The State could make all efforts to claim entire legitimate funds that are due to it from Government of India.
Para 12- The White Paper glosses over the raw deal that Kerala has received from the 13th Finance Commission. Kerala’s share in the tax revenue has reached the lowest mark at 2.6 percent. While the Central Transfers increased at 14.1 percent during the UDF period, it declined to 12.1 percent during the LDF period. In terms of share in the total revenue, the Central Transfers increased from 25.22 percent to 29.93 percent and then declined to 25.4 percent in 2009-10. True, this was the year of world economic crisis. In fact there was a decline of 330 crores in absolute terms in Central Transfers in 2009-10. This simple fact is forgotten by the White Paper when it discusses the higher revenue deficit of 2009-10. It also must be remembered that the impact of economic crisis is relevant for the state as it is for the centre. Why should then the share of Central Transfers in the total revenue of the state take such a dip?
Revenue Expenditure
13. While attempting to identify and evaluate the development alternatives, one cannot afford to lose sight of certain debilitating factors of Kerala economy. First factor is the revenue expenditure, which has been ever increasing and occupying a level above that of revenue receipts (Table T4) and the inflation rate
Para 13 - The data in table T4 gives the state’s revenue and expenditure as percentage of GSDP and once again confirms the fact that the state finances improved remarkably during the last five years. The decline in the tax GSDP ratio in 2009-10 is primarily due to decline of Central Transfers from 3.46 percent in 2008-09 to 2.88. Remarkable improvement in capital expenditure would become clear if the figure for 2010-11 is also considered. Revenue Deficit, Fiscal Deficit, Interest Payments, Primary Debt and Total Debt as a percentage of GSDP have declined during the last five years.
15. However, it dropped to 13.39% in 2008-09 and declined further to 10.3% in the following year (i.e., 2009-10). The total development expenditure has been in the range of 44 to 52% during this period.In 2006-07 the development expenditure declined to 44.58% of the revenue expenditure; it was 49.54% in 2007-08. This may be compared with the first 5 years of the decade 2001-11 when the development expenditure was generally of the order of 51-54% of the revenue expenditure. t is therefore evident that during these two years viz., 2006-07 and 2007-08, the development expenditure has suffered correspondingly. During these two years, the non development expenditure had increased which was otherwise in the range of 46.31% to 47.04% of the total revenue expenditure.
Para 15 - Yet another spurious conclusion is drawn regarding the trend in non development expenditure from table T5. It is claimed that the development expenditure was in the range of 51-54 percent of the revenue expenditure during the “first five years of the decade” while it declined to 44.5 percent and 49.5 percent in 2006-07 and 2007-08 respectively. The UDF government had refused to carry out the five year period customary salary revision. It appointed the Pay Commission only in its last year. Kerala developmental expenditure has a historical cycle closely correlated to the pay revisions. The 2006-07 and 2007-08 were pay revision years and that is the reason for the decline in the share of the developmental expenditure. There after it has climbed back to the range of 51 – 54 percent. This is yet another example of nit picking of fiscal data for political purposes.
16. A good proportion of rising revenue expenditure is on account of rise in the salary, pension and interest liabilities. Second factor is that the results from investment in the industrial sector have not been optimal. And to sustain even those sub-optionally performing industrial undertakings, requirement for further investments have indeed been going up. Third, some of the ventures in the infrastructure viz, in ports, airports, power, etc have not only been capital intensive, their gestation period too had virtually been on extension for various reasons, but significantly on account of delay in land acquisition. And Kerala having highest population density among the states of India, it becomes a costly affair to ensure land for any project. The time and cost of land acquisition has indeed been a spoilsport as far as development initiatives are concerned.
17. Revenue expenditure constituted 91% of the total expenditure Interest payments as percentage of revenue receipts ranged between 19 and 25 percent during the Twelfth Finance Commission award period against the normative recommendation of 15% by the year under report. Capital expenditure constituted only 6% of the total expenditure.
Para 16-17- The data in row 7 and 8 of Table T 6 shows that salaries, pensions and interests as a share of the revenue expenditure has tended to decline. This trend becomes even sharper when these components are considered as a percentage of revenue receipts. As per the revised estimate for 2010-11 the former ratio is 63.12 and the latter ratio is 70.46. When averages are taken separately for UDF and LDF periods, salaries, pensions and interest payment averages 67.15 during the UDF period and 65.52 percent during the LDF period. The salaries, pensions and interest payment as a percentage of the revenue receipts declined from 82.37 percent to 75.81 percent between the above two periods.
Revenue Deficit.
18. While capital expenditure has been far outweighed by the revenue expenditure, a good portion of resources has been mobilized through the borrowings, which were effected at a rising rate of interest.
19. Figures of revenue deficit (i.e., the difference between revenue receipt and the revenue expenditure) reveal a declining trend. When the UDF government assumed office in 2001, we had inherited the revenue deficit of 4.33%. Following the correctional path, that Government was able to bring it down to 3.08% in 2004-05 and finally 2.29% in 2005-06. The revenue deficit has had still further declined to 1.72%, 2.16%, 1.85% and 2.18% in years 2006-07 to 2009-10 in that order. But we are still away from the target of zero revenue deficit, that we have to achieve by 2014-15 under the Medium Term Fiscal Correction Path.
20. Fiscal deficit i.e., the difference between receipts and disbursals is an important indicator to gauge the functioning of the economy. By definition, a declining fiscal deficit signifies consolidation of the resources’ position and the sustainable functioning of the economy. When the UDF Government assumed power in 2001-02, the fiscal deficit was 4.2% of GSDP. That Government worked on the correctional course and brought down the fiscal deficit to 3.06% in 2005-06 (when the last UDF government demitted office in 2006). Subsequent figures of fiscal deficit explain that although in 2006-07 the fiscal deficit was 2.49%, the last LDF government could not control the deficit that hovered between 3.48% and 3.16% in next three years.
21. Fiscal deficit is usually financed by way of borrowings by the State. The quantum of fiscal deficit has been increasing during the last five years as has the total revenue been increasing. Obviously, the total debt of the state too has been increasing over the last decade. In the year 2001-02, it was A 26950 crore which increased to A 70969 crore in 2009-10. As per the latest indications, it will be at the level of A 78673 crore by 31.03.2011. This is estimated to reach the level of A 78673 crore by the end of March 2011. The rate of growth of debt during the period had been hovering between 8.57% and 20.58%. Consequently, the debt repayment liability too has been increasing correspondingly. Public debt repayment which was A 750.76 crore in 2001-02, rose to the level of A 2405.68 crore in 2009-10. In addition, increasing reliance on debt for financing current expenditure (not capital expenditure), increase in the debt liability on account of loans raised by the SPVs on the strength of government guarantee and the commitments on account of debt servicing, all manifest in enlargement of the size of our debt. Details of growth of debt is given in the Table T7.
22. The decade 2001-11 had inherited the fiscal deficit at 5.34% of its Gross State Domestic Product (GSDP) (in 2000-01). It went on decreasing to a lower level of 3.42% in 2009-10. This by itself may be a little reassuring, but the real cause of worry is the revenue deficit. The table T2 above shows a trend of decline in it with 2.18 % in 2009-10. But again, this declining trend per se does not give any room for complacence; the normative targets stipulated in the recommendations of the XIII Finance Commission still remain to be achieved. The target was to restrict the revenue deficit to 1.4% in 2011-12 and eliminate it altogether by 2014-15. This will be a challenging task and has to be achieved by 2014-15. Further, these targets will attain statutory force once the State’s Fiscal Responsibility Act is amended in line with the fiscal adjustment path prescribed by the 12th Finance Commission. The last Government has not amended the Act. We have to amend the same to incorporate targets of fiscal correction course, lest we lose out our share of grants from Government of India.
Para 18-22- For the sake of convenience the relevant data on revenue deficit, fiscal deficit, primary deficit and debt – GSDP ratio is summarized in table AT7. It clearly shows all these ratios are being lowered during the LDF period when compared to the UDF period. Revenue deficit GSDP ratio declined from 2.66 percent to 1.86 percent. The fiscal deficit ratio declined from 4.5 percent to 3.09 percent. The primary deficit declined from 1.32 percent to 0.71 percent. Debt ratio declined from 35.55 percent to 31.17 percent. The facts speak for themselves and no further comments are required.
Table AT7
Trends in deficits/GSDP ratio
Year | RD | FD | PD | Debt/GSDP |
2001-02 | 3.34 | 4.2 | 1 | 34.59 |
2002-03 | 4.74 | 5.74 | 2.35 | 35.74 |
2003-04 | 3.81 | 5.73 | 2.29 | 38.73 |
2004-05 | 3.08 | 3.73 | 0.7 | 35.11 |
2005-06 | 2.29 | 3.06 | 0.28 | 33.56 |
2006-07 | 1.72 | 2.49 | -0.24 | 32.43 |
2007-08 | 2.16 | 3.48 | 1.01 | 31.64 |
2008-09 | 1.85 | 3.16 | 0.84 | 31.47 |
2009-10 | 2.18 | 3.42 | 1.12 | 30.81 |
2010-11 RE | 1.41 | 2.89 | 0.81 | 29.52 |
UDF average | 3.45 | 4.49 | 1.32 | 35.55 |
LDF average | 1.86 | 3.09 | 0.71 | 31.17 |
23. Deficit in the Government accounts represents the gap between revenue and expenditure. Nature and extent of deficit indicates the extent of prudence exercised in fiscal management of the government. Equally important is the way the deficit is financed to determine the fiscal health of the State. It would suffice to refer to the report of Comptroller and Auditor General of India on State Finances for 2009-10 (Report No. 1). Main observations contained therein are as under:-
i. There was an increase of 35.3% in revenue deficit during 2009-10, which was due to 10.3% increase in revenue expenditure compared to 6.5% increase in revenue receipts.
ii. Revenue deficit increased to 2.3% of GSDP (from 2%) and the fiscal deficit grew upto 3.7% in 2009-10 (from 3.5%).
iii. The ratio of revenue deficit to fiscal deficit declined steadily from 74.82% in 2005-06 to 58.5% in 2008-09 but increased again to 63.8% in 2009-10 which indicated that borrowed funds were increasingly used for revenue expenditure rather than capital expenditure.
iv. Market borrowings to finance the fiscal deficit constituted 34.8% of the total financial resources in 2005-06 which grew up to 46.7% in 2006-07 and 59.6% in 2007-08. It shot up to 75.3% in 2008-09 and declined to 59.8% in 2009-10. These figures reveal that market borrowings were mainly relied upon to finance the fiscal deficit.
Para 23- The long quotation from C and AG does not elucidate anything regarding how deficit is being financed as described by the White Paper. The observations regarding deficits of 2009-10 by C &AG does not take into consideration the following simple facts.
a. 2009-10 was the year when the impact of the recession was most severe on public finance. All states in India had to deviate from the fiscal consolidation path and went into red. The sharpest increase was in the deficits of the Central Government itself.
b. As for Kerala the transfers from Central Government declined in absolute terms.
c. The state had consciously taken a policy decision to carry out a stimulus package which meant significant increase in revenue expenditure and giving administrative sanction for large number of public works. And this policy is correct in the period of recession. Even Reserve Bank of India Report on State Finances positively referred to Kerala’s stimulus packages.
d. The ratio of Revenue Deficit to fiscal deficit average 76.84 during the UDF period. It in fact declined to 60.19 percent in the LDF period.
The share on market borrowings has indeed gone up. We consider it a positive trend. But for concessional loans market borrowing provides cheapest credit.
24. Causes of worry do not stop with the figures of revenue deficit. States own revenue has been in the range of 8.30% of GSDP (in 2001-02) and 9.20% of GSDP in 2003-04. In fact, the second half of the preceding decade saw the State’s own revenue at 7.83% in 2005-06, 8.37% in 2006-07, 8.50% in 2007-08, 8.73% of GSDP in 2008-09 and 8.46% in 2009-10. Compared to this, the revenue expenditure has been growing at much higher rates, hovering between 16.98% and 13.46% of GSDP in 2002-03 and 2005-06 respectively Further, capital expenditure figures hardly offer any hope; it has always been less than 2% of GSDP.
Para 24- The data presented in table T8 has already been discussed. They point to a definite improvement in the financial situation in the last two years. Only one more point needs to be made which is regarding the capital expenditure. In table T8 capital expenditure has been defined to include loan disbursements. This tends to confuse the trend. In 2003 a huge loan was extended to KSEB as part of the structural adjustment program financed by ADB. This boosts the capital expenditure for the year giving rise to an abnormal ratio of capital expenditure to GSDP of 1.99 percent. To get a clear picture one has to examine the capital outlay on public works and loan disbursements separately. Relevant data is presented in Table AT 8
Table AT8
Trend in capital outlay and loan disbursements
There has been a remarkable increase in the capital expenditure. The capital expenditure excluding loan disbursement increased from 577 crores in 2000 – 01 to 817 in 2005-06. Thus UDF period witnessed 41.59 percent increase in outlay. By 2010-11 it had increased to Rs 3193 crores, ie, an increase of 290.82 percent. The remarkable transformation of the trend in capital expenditure is also evident from the GSDP ratio which fluctuated between 0.57 percent to 0.79 percent during the UDF period steadily improved to 1.2 percent at the end of LDF period. Instead of presenting the data with clarity the White Paper is trying to confuse by presenting consolidated figure of capital outlay and loan disbursement.
Debt Profile
26. The debt’s growth rate during the last five years has been meandering from 9.67% in 2005-06 and 8.59% in 2006-07 to 11.10% 14.19% and 12.17% in years 2007-08, 2008-09 and 2009-10 respectively. Despite the declining trend in 2005-06 and 2006-06 the debt has shown the tendency to grow to higher levels in 2007-08, 2008-09 and 2009-10.
Para 26- 26. We have already discussed the relevant information regarding the growth of debt, ie, debt-GDP ratio which has declined. Even rate of growth of debt stock has declined during the last five years when compared to the previous five years. The above year wise “trends” only contributes to confusion.
27. As indicated earlier in table T7, the total debt of the State has been going up, particularly during the last 10 years. It stood at A 70969 crore by the end of 2009-10 against A 26950 crore in 2001-02. This would be reaching the level of A 78673 crore by the end of 2010-11. The rate of growth of debt during the decade 2001-2010 has been in the range of 8.59% to 20.58%.
Para 27 - White Paper is going on repeating the absolute size of debt. At least the authors of the White Paper should understand a state cannot borrow more than what is permitted by the Central Government. During the last two years when the debt is claimed to have grown abnormally the state’s fiscal deficit was significantly lower than the permissible 4 – 3.5 percent.
28. In addition, there is yet another indicator which is quite alarming and indeed disturbing. The per capita debt in the State has been going up during the last few years. It was A 11478 in 2004 but it has gone up to A 16074 in the year 2008. Per capita debt at the national level is A 10018. Hence the per capita debt of Kerala is almost 60% above the national average of per capita debt. Further, it is also more than the per capita debt of A 8901 in Karnataka and A 9692 in Tamil Nadu (in 2008). Arguably, debt per se may be a necessity for the economy at a particular juncture of time. But it cannot be untrammeled by the imperatives of efficient financial resource management; it is rather saddled with certain hard options for the management of State resources as its condition precedent.
Para 28 - After dilating on the expansion of debt in absolute number the White Paper turns to Per capita debt. This is getting hilarious. The discussion on debt profile by comparing per capita debt does not make any economic sense. It will imply that a growing economy with a slower population growth can not borrow. Debt sustainability has to be discussed with reference to a) growth rate of the resource base, proxied by GSDP b) interest rate on borrowings and c) utilisation of debt whether for productive purposes.
29. The Internal Debt comprising Market Loans, special Securities issued to NSSF, Negotiated loans, bonds, etc. stood at A 43368 crore in 2009-10. That was 12.03% higher than its previous year’s total that stood at A 38814 crore which itself was 11.73% more than its previous yearThe percentage by themselves may look innocent and do not convey the ferocity of the quantum as the borrowing has increased the per capita debt from A 12503 in 2005 to A 16074 in 2008 and A 19626 in 2010.
Para 29- The Internal Debt comprising Market Loans, special Securities issued to NSSF, Negotiated loans, bonds, etc. stood at A 43368 crore in 2009-10. That was 12.03% higher than its previous year’s total that stood at A 38814 crore which itself was 11.73% more than its previous year. The percentage by themselves may look innocent and do not convey the ferocity of the quantum as the borrowing has increased the per capita debt from A 12503 in 2005 to A 16074 in 2008 and A 19626 in 2010
31. Comptroller and Auditor General of India in his Report on State Finances for 2009-10 (Report No. 1) has further observed as under : “Apart from the magnitude of debt of the State Government, it is important to analyze various indicators that determine the debt sustainability of the State”
Para 31- Debt sustainability indicators are two: one is the difference between the real rate of growth of the economy and the interest rate and the level of primary deficit. If one looks at the data, the difference between the growth rate and the interest rate has increased in recent years, implying that sustainability indicator has become favourable to the state. Also the primary deficit declined between 2007-08 and 2008-09, although it increased in 2009-10, the year of crisis. It needs to be emphasized that growth promoting primary expenditure is always better than a declining primary deficit.
32. Debt sustainability refers to the state’s ability to maintain a constant debt-GDP ratio over a period of time. Thus it implies State’s ability to service the debt. It would therefore mean sufficiency of liquid assets to meet the current or committed obligations and the capacity to maintain a balance between cost of additional borrowings and the returns from the borrowings. It would also mean that the rise in fiscal deficit must match the increase in capacity to service the debt.
Para 32 - It is absolutely incorrect to say that debt sustainability refers to the state’s ability to maintain a constant debt to GSDP ratio. As mentioned above, it is a combination of growth, interest rate and primary deficit, which the white paper also acknowledges. Judging by these there indicators and level fiscal consolidation achieved by the state in the LDF regime, does give a sustainable debt to GSDp ratio path for the future. The point is whether the present regime will be able to sustain this path of fiscal consolidation achieved by the LDF Government.
33. Stability of debt can be achieved if the rate of growth of economy exceeds the interest rate or the cost of public borrowings. Then the debt GDP ratio can be used as an indicator provided primary balances are positive or zero or marginally negative. Debt sustainability can be achieved if the quantum spread (debt multiplied by the rate spread ; rate spread is GSDP growth rate minus interest rate) together with primary deficit is zero. Then the debt GSDP ratio would be constant or the debt would eventually stabilize. If however, quantum spread and the primary deficit together is negative, the debt-GSDP ratio would be rising.
34. It is on this principle that CAG has observed in the Report referred in para 23 above as under :-
“During 2007-08 to 2009-10, the quantum spread together with primary deficit was positive, indicating declining trend in debt GSDP ratio. The resource gap (sufficiency of non-debt receipt) was negative throughout the period 2007-10 which showed that the incremental non-debt receipts were inadequate to finance incremental primary expenditure and incremental interest burden. This means that the government will have no option but to go for debt receipts to meet its operational expenditure, Moreover, the net availability of borrowed funds after providing for interest and repayment of principal decreased during 2009-10 from the previous years which shows that a larger part of borrowings was used for current consumption including debt servicing, leaving only a small portion of the borrowed funds to be spent for developmental activities. The burden of interest payment (interest payment to revenue receipt ratio) was much higher in Kerala (20%) than the TFC recommended norm of 15%.”
Para 33-34 - The interest payment as a percentage of total revenue expenditure declined from 20.02 per cent in 2004-05 to 15.53 per cent in 2009-10. In other words, states ability to service debt not only increased, its incidence on total expenditure declined substantially during the LDF regime. It is also inappropriate on the part of the CAG to compare the debt sustainability indictors of 2007-08 and 2009-10. The increase in the primary deficit in 2009-10 was due to the global financial crisis induced increase in enhanced borrowing permitted by the central government and corresponding increase in the primary deficit. It is also to be noted that in totality if we look at, the capital expenditure to GSDP ratio between 2004-05 and 2009-10, with a corresponding decline in the fiscal deficit. Thus, this exaggerated concern about sustainability is not based on facts.
Debt Sustainability
The Kerala Public Expenditure Review Committee has projected the fiscal profile of the state of Kerala to examine if the present fiscal policy stance continues, whether the state of Kerala would be able to adhere to the fiscal restructuring path proposed by the Thirteenth Finance Commission and would it have a sustainable level of fiscal deficit and debt. The Committee also incorporated the likely impact of pay revision on the fiscal imbalance of the state.
The Committee appreciated the fact that there has been substantial fiscal correction in the FY 2008-09, 2009-10 and is expected to be so in 2010-11 (BE). The Committee has also estimated the movement of key fiscal indicators based on the assumption that the current fiscal situation would continue in the medium term. The period of projection is from 2011-12 to 20014-15. The base year of projection is 2010-11 (BE).
The evolved fiscal path (as percent to GSDP) is shown in Table 1. As evident from the Table, if the present fiscal situation continues, would result in steady decline in the revenue deficit and emergence of revenue surplus by the end of the 2013-14, a steady decline in the fiscal deficit to GSDP ratio to 1.3 percent of GSDP by the end of 2014-15 and a steady decline in the debt to GSDP ratio to 19.5 percent by the end of 2014-15.
However, given the 9th Pay Commission’s award and expenditure commitment arising out of it needs to be incorporated in the fiscal adjustment path to examine whether the state can comply with the revised road map for fiscal consolidation proposed by the Thirteenth Finance Commission even with an increase in the salary expenditure. The total additional expenditure in the year 2011-12 on account of salary and pension including arrears will be Rs. 5419 crore and in the next year the expenditure on salary alone would be Rs. 2085 crore. It is assumed that the incremental salary expenditure will grow at the same rate as in the past growth of salary expenditure and project it forward upto 2014-15. When this additional salary expenditure profile is added to the fiscal scenario reported in Table AT9, the fiscal imbalance increases but remains within a manageable limit and remains fully compliant with the revised road map for fiscal consolidation except for 2011-12. Even with the salary increase, the total fiscal deficit by the terminal year of projection would be 2.1 per cent with a revenue surplus of 0.2 per cent of GSDP. This results also shows us that given the recommendations of the Thirteenth Finance Commission to have a fiscal deficit target of 3.5 per cent and then to 3 per cent by the end of 2013-14, the state would be able to augment capital expenditure to the order of around 1 per cent of GDP by remaining within the sustainable levels of deficit as defined by the Finance Commssion. This only points that the fiscal consolidation achieved by the LDF government has put the fiscal profile of Kerala in a long run sustainable path.
Table AT9:
Scenario 1: Fiscal Profile and Debt Sustainability: Medium Term Perspective (Per cent to GSDP)
2010-11 BE | 2011-12 | 2012-13 | 2013-14 | 2014-15 | |
Revenues | 12.7 | 13.0 | 13.2 | 13.4 | 13.7 |
Own Tax Revenues | 8.5 | 8.7 | 8.8 | 8.9 | 9.1 |
Sales Tax | 6.2 | 6.3 | 6.3 | 6.4 | 6.5 |
State Excise Duties | 0.8 | 0.8 | 0.8 | 0.8 | 0.8 |
Stamp Duty and Registration Fees | 0.9 | 1.0 | 1.0 | 1.1 | 1.2 |
Other Taxes | 0.7 | 0.7 | 0.7 | 0.7 | 0.6 |
Own Non-Tax Revenues | 0.9 | 0.9 | 0.9 | 0.9 | 0.9 |
Central Transfers | 3.3 | 3.4 | 3.5 | 3.6 | 3.7 |
Tax Devolution | 2.0 | 2.0 | 2.1 | 2.1 | 2.1 |
Grants | 1.3 | 1.3 | 1.4 | 1.5 | 1.5 |
Revenue Expenditure | 14.2 | 13.9 | 13.5 | 13.0 | 12.6 |
General Services | 6.2 | 6.2 | 6.0 | 5.8 | 5.6 |
Interest Payments | 2.4 | 2.3 | 2.1 | 1.9 | 1.6 |
Pension | 2.2 | 2.2 | 2.2 | 2.2 | 2.1 |
Other General Services | 1.6 | 1.7 | 1.7 | 1.8 | 1.8 |
Social Services | 5.3 | 5.2 | 5.1 | 5.0 | 4.9 |
Education | 2.7 | 2.6 | 2.6 | 2.5 | 2.4 |
Medical and Public Health | 0.8 | 0.8 | 0.8 | 0.7 | 0.7 |
Other Social Services | 1.8 | 1.8 | 1.8 | 1.7 | 1.7 |
Economic Services | 1.6 | 1.5 | 1.4 | 1.3 | 1.2 |
Compensation and Assignment to LBs | 1.1 | 1.1 | 1.0 | 1.0 | 0.9 |
Capital Expenditure | 2.0 | 2.1 | 2.2 | 2.2 | 2.3 |
Capital Outlay | 1.7 | 1.7 | 1.8 | 1.8 | 1.9 |
Net Lending | 0.3 | 0.4 | 0.4 | 0.4 | 0.5 |
Revenue Deficit | 1.5 | 1.0 | 0.3 | -0.4 | -1.1 |
Fiscal Deficit | 3.5 | 3.1 | 2.5 | 1.9 | 1.3 |
Primary Deficit | 1.1 | 0.7 | 0.4 | 0.0 | -0.4 |
Outstanding Liabilities | 32.0 | 28.9 | 25.8 | 22.6 | 19.5 |
Table AT9 A: Scenario 2:
Fiscal Profile and Debt Sustainability: Medium Term Perspective with Salary Increase
2010-11 BE | 2011-12 | 2012-13 | 2013-14 | 2014-15 | |
Revenues | 12.7 | 13.0 | 13.2 | 13.4 | 13.7 |
Own Tax Revenues | 8.5 | 8.7 | 8.8 | 8.9 | 9.1 |
Sales Tax | 6.2 | 6.3 | 6.3 | 6.4 | 6.5 |
State Excise Duties | 0.8 | 0.8 | 0.8 | 0.8 | 0.8 |
Stamp Duty and Registration Fees | 0.9 | 1.0 | 1.0 | 1.1 | 1.2 |
Other Taxes | 0.7 | 0.7 | 0.7 | 0.7 | 0.6 |
Own Non-Tax Revenues | 0.9 | 0.9 | 0.9 | 0.9 | 0.9 |
Central Transfers | 3.3 | 3.4 | 3.5 | 3.6 | 3.7 |
Tax Devolution | 2.0 | 2.0 | 2.1 | 2.1 | 2.1 |
Grants | 1.3 | 1.3 | 1.4 | 1.5 | 1.5 |
Revenue Expenditure | 14.2 | 15.9 | 14.3 | 13.9 | 13.5 |
General Services | 6.2 | 6.2 | 6.1 | 6.0 | 5.8 |
Interest Payments | 2.4 | 2.3 | 2.2 | 2.0 | 1.8 |
Pension | 2.2 | 2.2 | 2.2 | 2.2 | 2.1 |
Other General Services | 1.6 | 1.7 | 1.7 | 1.8 | 1.8 |
Social Services | 5.3 | 5.2 | 5.1 | 5.0 | 4.9 |
Education | 2.7 | 2.6 | 2.6 | 2.5 | 2.4 |
Medical and Public Health | 0.8 | 0.8 | 0.8 | 0.7 | 0.7 |
Other Social Services | 1.8 | 1.8 | 1.8 | 1.7 | 1.7 |
Economic Services | 1.6 | 1.5 | 1.4 | 1.3 | 1.2 |
Compensation and Assignment to LBs | 1.1 | 1.1 | 1.0 | 1.0 | 0.9 |
Capital Expenditure | 2.0 | 2.1 | 2.2 | 2.2 | 2.3 |
Capital Outlay | 1.7 | 1.7 | 1.8 | 1.8 | 1.9 |
Net Lending | 0.3 | 0.4 | 0.4 | 0.4 | 0.5 |
Revenue Deficit | 1.5 | 2.9 | 1.1 | 0.4 | -0.2 |
Fiscal Deficit | 3.5 | 5.0 | 3.3 | 2.7 | 2.1 |
Primary Deficit | 1.1 | 2.7 | 1.0 | 0.6 | 0.3 |
Outstanding Liabilities | 32.0 | 30.8 | 28.1 | 25.4 | 22.6 |
35. There is another comment by CAG in his report “Union and state Finance At a Glance 2009-10”, which is quoted below.
“… As on 31 March 2010, as many as 17 States have more liabilities than financial assets. West Bengal, Kerala and Punjab have financial liabilities more than double of their financial assets ….”
36. Kerala’s ratio of financial assets to liabilities of the state in the years 2007-08, 2008-09 and 2009-10 had been 36,39 and 39. This indicator explains why Kerala has been included in the list of debt stressed states, along with West Bengal and Punjab.
Para 35-36 - Paragraphs 35 and 36 quotes C & AG report on assets and liabilities ratio. It states that Kerala along with West Bengal and Punjab has debt more than double the assets. If the ration is computed as Borrowings in a Financial Year/ as (Capital Outlay + Net Lending) Kerala’s ratio has come down to 2.6 during 2006-07 to 2010-11 from 4.8 in 2000-01 to 2005-06. This is a sign of clear improvement. It is interesting to note that now the measure of debt stress is liability/asset ratio. Till recently it was defined in relation to half a dozen indicators like debt – GDP ratio, interest to revenue expenditure ratio etc based on which Kerala was declared to be debt stressed. During the last 5 years we achieved the targets and then the ceilings were arbitrarily reduced to continue to keep us debt stressed. Now C and AG has only one criterion – an arbitrarily fixed liability/asset ratio diverse from all historical trends. This only goes to show that all these great principles bandied about by the neo liberals have really no grounding in real economic theory.
37. Yet another area of concern is the government guarantees. It is true that the quantum of guaranteed amount as well as amount outstanding has come down to A 10225.78 crore and A 7495 crore respectively in 2009-10. However, an increased possibility of invoking government guarantees has been a matter of concern because, if invoked, these guarantees may put an unexpected pressure on the State exchequer. Perhaps the time has come we should seriously review the economics of contingent liabilities.
Para 37. The outstanding guarantee today is around half the ceiling and has been steadily declining. Now the white paper wants to “seriously review with the economics of contingent liabilites”. Do they want to abolish state guarantees?
38. The surplus cash balance in the State Government’s account as on 18.5.2011 was A 1963.47 crore. As explained earlier, it gives an impression of comfortable liquidity position but it is actually quite discomforting. This amount has accumulated because of the fact that a portion of the committed liabilities of 2010-11 had spilled over to the current financial year. A major component of this treasury surplus will have to be spent on Pay Revision Pension Revision arrears. Even though the 9th pay revision is applicable w.e.f. 01.07.2009, the process of eliciting options and processing the same for preparation of arrears could not be completed within March 2011. Consequently, major share of this liability will fructify for payment in 2011-12, and payments will have to be effected immediately. The table below (T10) indicates the liabilities that were committed during the previous year(s), resulting in immediate outflow from State’s exchequer.
Para 38. This is indeed an admission that there sufficient treasury surplus that has been carried into the year 2011-12 to meet the spillover commitments which has been enumerated in table T10. In a budget of more than 40000 crores it is not surprising at any moment of time there would be some amount of committed liabilities. White Paper is making a mountain of a mole hill. As regards treasury surplus we had clarified our position in the introduction itself.
Table : T10
Outstanding Commitments causing immediate outflow
Arrears of Salaries and Pension | 800 |
Outstanding payments to contractors | 425 |
Electricity subsidy to farmers | 27 |
Farmers’ debt relief | 27 |
Cost of Medicines / equipments, etc. | 13.80 |
MLAs’ Special Development Fund – Additional allocation | 35 |
Kerala State Co-operative Bank-Share Capital | 136 |
Social Security Pensions & Welfare Pensions at enhanced rate | 200 |
Ration Subsidy (food grains @ 2 per kg.) | 266 |
Arrears of compensation for paddy procurement & market intervention operations (to Supplyco) | 125 |
Land acquisition charges | 100 |
Total | 2154.80 |
39. During the last 10 years, the fiscal deficit and revenue deficit as also the primary deficit have all been coming down. In fact, the state witnessed negative primary deficit in 2006-07. Since primary deficit is comprised of the fiscal deficit minus interest payment, this only gives a partial view of the financial health of the state. Thus negative primary deficit by itself does not give room for complacence. Our other main concerns are the revenue deficit and the fiscal deficit. The 13th Finance Commission’s recommendation is to eliminate the revenue deficit by the year 2014-15 and restrict the fiscal deficit to 3.0% from 2013-14 onwards. The targets for the current year are at 1.4% and 3.5% for the revenue deficit and the fiscal deficit respectively. Immediate past data show that the fiscal deficit has generally been within the limits prescribed under the fiscal correction path, ranging between 2.49% and 3.42% during the period from 2006-07 onwards. But during the same period, revenue deficit has not been showing any uniform pattern; it has ranged between 1.72% to 2.17% from 2006-07 onwards. The table T4 in para 13 ante indicates it.
Para 39. Paragraph 39 is anti-climax of the White Paper. It admits all indicators of fiscal sustainability have improved. This is obviously so in the period 2006-07 to 2010-11
Committed Liabilities
We shall summarise each of the committed liability and comment only on those items which we feel should not be treated so.
Arrears of salary and pension to employees and pensioners
41. The fiscal year 2011-12 has to inherit a substantial share of liabilities of 2010-11, which remained unsettled by 31st March 2011. These are briefly indicated in succeeding paragraphs. These will fructify in course of 2011-12 and later.
42. Revision of Pay and Pension of State Government Employees and Pensioners has always been putting State’s finances under severe pressure, affecting the resources for developmental spending. The State Government had in 2010-11 revised the Pay and Pensions effective from 01.07.2009. The annual financial commitment on this account is estimated as A 1964 crore. The arrears of pay and pension payable from 1.07.2009 to 31.03.2011 accounts for A 2861 crore. These together works out to a total liability of A 4825 crore.
Para 42-43 – The White Paper admits that the committed liability of pay revision is Rs. 4825 crores. There would be an additional liability of increase in DA/DR. For meeting these liability an additional provision for 6518 crores is provided. Salary/pension revision normally spreads over two years. As per the White Paper there is an outstanding committed liability for arrears in salaries and pension of Rs. 800 crores even after the lapse for 4 years. Therefore with certainity one can say that there is a cushion of 2500 crores on this item alone.
45. In terms of G.O. (Rt) No. 1911/2000/Fin dated 29.03.2000, the State Government is also committed to provide grant in aid to Co-operative Academy of Professional Education (CAPE) to the extent of 25% of the deposits mobilised from primary Co-operative Societies as a part of resource mobilisation drive under the Treasury small savings Fixed Deposit Scheme. Against A 81.91 crore due to CAPE on this account, A 40.86 crore has been released so far. A 40.85 crore is still outstanding.
46. For the revitalization of the Kerala State Co-operative Bank, an action plan has been drawn up in 2010-11 with the approval of NABARD and Government of India. The Action Plan aims at the Bank achieving a positive net worth by improving its financial position over a period of 3 year by augmenting its share capital base by A 344 crore. Government released A 150 crore in 2010-11 as State’s equity contribution to the Bank. The balance contribution of A 194.20 crore is to be made during 2011-12 and 2012-13.
Para 45-46 - Dues payable to Co-operative Institutions/ Banks etc.
(i) Agriculture Production cost Relief Scheme. (Rs 44crores)
(ii) Grant to CAPE against Deposit Mobilisation through Co-operatives (Rs. 40.85 crores)
(ii) Additional Share Participation in Kerala State Co-operative Bank (194.20 crores)
This is not a committed liability. 150 crores was released to bank last year on the understanding that NABARD would start refinancing and the bank would restructure themselves to improve their financial position.
47. Government procure paddy from farmers through the Kerala State Civil Supplies Corporation (Supplyco) and compensate the Corporation for its losses on this account. Apart from this compensation is payable to Kerala State Civil Supplies Corporation for its market intervention operations. Government has also to meet the milling charges. Claims to the tune of A 291 crore submitted by the Kerala State Civil Supplies Corporation (KSCSC) Ltd. for the period up to 31.03.2011 was pending to be settled, against the available budget provision of A 75 crore.
Para 47- Paddy Procurement and market Intervention operations by Kerala State
Civil Supplies Corporation (Rs 216 crores)
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