Kerala’s fiscal worries
D. Satheesan, Kerala’s Opposition Leader for the past five years, claimed that the UDF had “inherited” a virtually empty State treasury. A treasury so bare that, Mr. Satheesan quipped, a cat and her litter had made it their home. Humour aside, the state of Kerala’s finances will be in sharp focus as the new UDF government takes office. The State’s fiscal health and the Union’s fiscal policies vis-a-vis Kerala have been a dominant theme that coursed through the 10-year-rule of the Left Democratic Front (LDF) in Kerala. It never strayed from the centre of LDF-UDF interactions, and has more often than not, shaped the discourse of Centre-State relations.The tallest claims of the Pinarayi Vijayan government have been that it fast-forwarded development overcoming aggressively hostile Union government policies. Mr. Satheesan and the UDF have been vocal critics of the Left’s fiscal policy, and what they called Mr. Vijayan’s dismal failure in forcing the Bharatiya Janata Party (BJP) government to cede the State’s rightful share of financial resources. The UDF also bore down on the Kerala Infrastructure Investment Fund Board (KIIFB), a special purpose vehicle employed by the LDF government on coming to power in 2016 to mobilise funds for large-scale infrastructure projects. It questioned the LDF’s KIIFB model, asserting that off-budget borrowings made through the KIIFB would hurl the State into a debt crisis. The UDF drew its ammunition from multiple reports of the Comptroller and Auditor General which warned that uncontrolled off-budget borrowings would land Kerala in a serious debt trap. The Central government also frowned on borrowings through the KIIFB, treating them as the State government’s direct debt. In January 2023, the Opposition UDF published a white paper on the State’s finances. The document accused the LDF government of plunging Kerala into a financial crisis and ‘toxic debt’ through mismanagement, unbridled spending and subpar tax collection.Daunting challengeK.N. Balagopal, the outgoing Finance Minister, has refuted Mr. Satheesan’s claims about the UDF inheriting an empty treasury from the LDF. Kerala is now in a much better position financially, and multiple fiscal indicators, including the debt-to-Gross State Domestic Product (GSDP) ratio, testify to this, according to him.Nonetheless, reworking a fiscal landscape shaped on Left perspectives would be a daunting task for whoever takes charge as Kerala’s new Finance Minister. The primary job would be to keep the treasury running smoothly. Kerala’s financial model is marked by high expenditures on salaries, pensions and interest payments and hefty spending on social welfare. The limited space for improving own-tax revenues, negotiating the dynamics of Union fiscal policies with respect to the State’s curtailed borrowing space, and the implications of the 16th Finance Commission awards pose challenges. While Kerala’s divisible tax pool share has risen from 1.92% to 2.382%, the 16th FC has not recommended revenue deficit grants, sector-specific grants or State-specific grants. The Medium Term Fiscal Policy document had noted that Kerala faces fiscal stress from the “cessation of the goods and services tax (GST) compensation, revenue deficit grants, reduction in central share of taxes and declining assistance from Centrally Sponsored Schemes.” Needless to say, mobilising additional revenue would be a prime responsibility of the new government to take the development juggernaut forward and fulfill the five guarantees in its election manifesto. For instance, the UDF will be expected to make good on its promise that the monthly social welfare pensions would be hiked to ₹3,000. Currently at ₹2,000, these pensions are paid out to approximately 60 lakh people. In his May 4 press conference, Mr. Satheesan promised “results” — robust financial man
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