February 16, 2020

Kerala Budget 2020-21: Negation of Neo-Liberal Economics

K N Harilal

THE LDF government’s budget for the year 2020-21 is best described as an instrument of struggle of the people of Kerala against the regime of neoliberal economic policies imposed on the nation by the union government. The neoliberal onslaught on the nation, commenced way back during early 1990s, reached its zenith under the leadership of prime minister Narendra Modi.

The latest budgets presented by the union finance minister Nirmala Sitaraman show how the long drawn out process of neoliberal reforms has turned out to be a big tragedy for the nation. The country is suffering from economic stagnation, growing inequality, deprivation of the majority, and worst of all multiple fracture of the polity. The LDF budgets represent resistance as well as valiant struggle to move in the opposite direction upholding the goals of development, equity and welfare of the people. The neoliberal budgets, especially the recent ones have been vividly pro-cyclical in nature, attempting to cut not only government expenditure but compress the aggregate demand in the face of sustained economic slowdown caused primarily by widespread demand deficiency. In sharp contrast, the LDF budgets, in spite of severely limited fiscal space available to the state, have tried to be counter-cyclical, trying to boost demand by increasing expenditure and letting people have more income. As the finance minister Thomas Isaac rightly claimed the state budget is designed as a package of stimulus against the threat of economic depression looming large.

The union budget was full of sops to the corporate sector and the rich in general focussing mainly on supply side interventions to revive the economy. On the contrary, the primary focus of the state budget is on the demand side, exemplified by a plethora of old and new welfare measures. A leading announcement in this respect has been the decision to enhance welfare pensions of nearly fifty lakh beneficiaries by Rs 100 to a monthly sum of Rs 1,300. The welfare pensions have nearly doubled since the present LDF government assumed power. There has also been substantial increase in the number of pensioners. The story of welfare pensions is mentioned here to represent a fairly wide array of such measures to augment living conditions of the poor. The welfare measures announced are part of a comprehensive programme designed to address different sections such as the elderly, children, differently abled, and many other vulnerable groups. Further, as an instrument of stimulus, the state budget has announced major infrastructure programmes as well, that would boost income and demand in the short run besides attracting private investment and furthering development in the long run.

Kerala government’s concerted efforts to stimulate economic growth through proactive policies have started paying rich dividends. As the latest Economic Review of the state shows, Kerala economy is growing at a faster rate (7.2 per cent) compared to the national economy. The highlight of the growth story is the performance of the industrial sector. The share of the industrial sector in the state domestic product (SDP) increased from 9.8 per cent recorded in 2014-15 to 13.2 per cent in 2018-19. The revival of the manufacturing sector is a welcome development. There is also a visible improvement in the investment climate. The percapita income of the state is 1.6 times higher than the average income at the national level. If anything, the income distance between Kerala and the nation is growing over time. The LDF government could make such spectacular achievements in spite of the environmental disasters that struck the state, such as the cyclone Ocki in 2017 and the floods during 2018 and 2019, shrinking fiscal space, and the blatantly hostile policies of the union government.

The central government did not allow the state to receive the help offered by the foreign governments, especially from the Middle East, who wanted to help the state in the hour of need considering the invaluable service offered by expatriate Keralites in their nation building. Neither did it allow the state to borrow over and above the limit set by the FRBM Act. Instead of being liberal on borrowings what it did was to reduce the three per cent limit set under the FRBM act. The Modi government introduced a new practice of accounting wherein treasury deposits of government departments and employees are counted as liability of the government only to cut the borrowing limit of the state proportionately. Added to this have been the fall in tax disbursement and the delays as well as uncertainties in the payment of GST compensation. According to budget estimates there will be a shortage of nearly Rs 8,330 crores in central disbursements and allowable borrowings in the last quarter of the current financial year. Such hostile policies have landed the state treasury in serious stress, necessitating plan cuts and payment regulations.

The above situation of fiscal stress imposed from above necessitated a painful but bold decision to scale down the annual plan (2020-21) size by Rs 3,000 crores. It is noteworthy because it comes from a government steadfastly committed to the cause of development planning. The reduction in the plan size and the decision of the 15th Finance Commission to provide the state Rs 15,323 crores as revenue deficit grant, if realised fully and in time, would considerably ease the pressure on the treasury. Treasury restrictions in the state have a long drawn out history. It became acute during the previous UDF government when it introduced queuing of bills, arbitrary cuts of budget commitments and a system of electronic ledger to park unspent funds. Such ad hoc measures of treasury management undermine democratic control over public finance. They disrupt the priorities set by the council of ministers and voted by the legislature. Treasury restrictions also upset the process of implementation of plan and non-plan programmes. Uncertainty regarding availability of funds drains confidence of suppliers, contractors, administrators and even the political leadership. The decision to cut the plan size in advance would help address the problems outlined above.

The decision to reduce the plan size, it should be underlined, would not lead to a cut in welfare or development expenditure. Such a cut in government expenditure is not advisable in the present context of economic slowdown. First, as the pattern of allocation of resources among competing goals, and the newly announced programmes, show government has made a prudent effort to reset the priorities considering the resource constraint. Expenditure items deserving sympathetic consideration or having strategic importance are not cut. There are also many instances of substantial increase in allocations.

The flagship programmes of the state government in the area of public health, general education, environment and waste management, and housing for the poor will get considerably augmented allocation. The public sector undertakings of the state will not face the threat of disinvestment or privatisation. On the contrary, they will get enhanced support from the budget. Incidentally, the public sector in the state has been registering spectacular improvement in their profits and other performance indicators in the recent past. Second, there will be large increase in the expenditure of institutions such as Kerala Infrastructure Investment Fund Board (KIIFB), financed by way of extra budget borrowings. KIIFB has passed the stage of initial hiccups. Therefore, execution of projects and spending would pick up momentum during the year. KIIFB has already expended Rs 4,500 crores on its completed infrastructure programmes. It has by now given preliminary clearance for 675 projects with an outlay of Rs 35,028 crores. The expenditure on KIIFB financed projects for the year 2020-21 is estimated to be Rs 20,000 crores.

Interestingly, for the LDF government ‘extra budget borrowings’ is not the first best option to finance development. It was forced to go for such suboptimal options because of the cap put on borrowings under the FRBM Act. There is no doubt that budget is a much better tool for managing public finance, in mobilising  resources as well as spending,  because it is easily amenable for legislative scrutiny and democratic control. Plausible instabilities in the revenue account arising from either the receipt side or the expenditure side, and persistence of ways and means problems in the treasury can upset the off-budget borrowing targets, as well as the anticipated cost of borrowings. Obviously, if the government is not vigilant and not committed to the values of democracy, and the prudency norms, the extra budgetary mechanisms can err in multiple ways.

But, the present LDF government, avowedly committed as it is to democracy, would not allow such possible slips. Further, the government is making special efforts to integrate programmes undertaken through the budget and off-budget borrowings. It is important to avoid duplication of efforts and to achieve synergies. Contextually, the interim report of the 15th Finance Commission has stressed the need to phase out extra-budget borrowings of the centre as well as the states. Such a position is unwelcome as it comes in the midst of an economic crisis. The commission should either substantially enhance the ceiling on fiscal deficit or formally accommodate off budget borrowings. The commission should also take a lenient and more responsible position regarding government guarantees which are too restrictive now. The finance commission should also ensure that its recommendations regarding revenue deficit grant is fully honoured by the central government. The present times of crisis demand highly responsible and well balanced policy postures from the finance commission as well as the central government.