THE revised budget of the Kerala government for 2016-17 presented by the finance minister Dr T M Thomas Isaac will be noted for the historic effort it makes to cross the barrier of neoliberal fiscal conservatism. The upper limit of fiscal deficit set for the state government is three percent of the state domestic product (SDP). This cap on borrowings is too debilitating for the state government, especially in view of the mounting revenue deficit of the state. The situation is so bad that practically all that the state government is allowed to borrow would have to be spent for meeting the revenue deficit.  Obviously, if the LDF government had chosen to remain within the conservative limits set from above, it would not have got the elbow room to do justice to the overwhelming popular mandate for building a new and vibrant Keralam. The revised budget is taking a two pronged strategy to overcome the fiscal crisis; first, by stretching the space available within the confines of the budget and second by building a new fiscal space outside the budget.

The Pinarayi Vijayan government is facing unenviable challenges on the economic front. After two decades of better performance, recently the rate of growth of the state’s economy had dropped below the national average. The global economic crisis and its manifestations in the commodities market, not to mention the worsening crisis in the Middle East, are causing serious uncertainties in the economy. Added to this is the pressure of expectations generated by the LDF victory. The people are expecting immediate measures to revive the welfare machinery of the state, which is currently in a bad shape. It is also widely expected that the new government would do everything that is needed to push the economy out of the recession that is threatening to set in. But, the public finance of the state is in such a bad shape that it would not allow any room for the much needed big bang beginning. 

Under the UDF rule, the state had drifted away from the fiscal consolidation path begun during 2001. During the previous LDF government (2006-2011) the average figures of revenue and fiscal deficit were 1.83 percent and 3.04 percent respectively of the SDP. Note that this was a major improvement over the averages of 3.4 percent and 4.42 percent recorded during 2001-06 when another UDF government was in power. From 1.83 percent and 3.04 percent registered during the LDF government (2006-11), the outgoing Oommen Chandy government (2011-16) had hiked the revenue and fiscal deficit ratios respectively to 2.3 percent and 3.54 percent.  Moreover, as the projections made by the white paper suggests, if things are allowed to continue the same way, the revenue deficit would have crossed the 3 percent mark in two years.

The conventional way out is to maximise revenue and cut down on revenue expenditure. The new government is fully committed to maximise the revenue receipts. The incumbent finance minister has an exemplary track record in revenue mobilisation. The previous LDF government could achieve record growth in tax collection by improving the collection machinery, that too without raising the tax rates or placing additional burden on the people. The present budget promises to continue the same strategy and hopes to raise the rate of growth of tax collection to twenty to twenty five percent per annum. However, the political philosophy of the new government is not in favour of reducing the size of the government. This does not mean that the government is not serious about financial discipline. On the contrary, the budget presents a clear road map for reducing non-plan revenue expenditure so that the revenue deficit can be completely eliminated over the medium term. 

But, the fiscal discipline cannot be at the expense of developmental and welfare functions of the government. Therefore, the budget is giving a big bang beginning to the new government by launching a wide array of programmes announced in the LDF election manifesto. Obviously, given the space constraints of an article like this it is difficult even to list the programmes announced in the budget. However the direction of change is clear. The LDF government is going to significantly improve quantitatively as well as in terms of quality the welfare and social security services of the government. For instance, the minimum welfare pension is enhanced to Rs 1000 per month, the arrears of which would be cleared in three months, and payments thenceforth would be one month in advance. The pension programme will now cover all the needy above the age of sixty. Similarly, the coverage of the health security programme is going to be extended besides making its delivery more efficient. The public distribution system and the mechanism for controlling the prices of essential commodities, including medicines, which were in a bad shape, would be revamped. Agriculture, animal husbandry, fisheries, traditional industries, etc are going to get substantial enhancement in their budget allocation. The quality of public schooling in the state is going to be enhanced to the international standards by improving infrastructure on the one hand and enhancing local participation of the people on the other.

The welfare and social security commitments are not going to be at the expense of public investment in infrastructure. The state needs to improve infrastructure facilities in the state to be able to attract private investment, especially because of its principled position on labour rights and environmental security. The budget has announced a massive stimulus package of Rs 12,000 crores to address the threat of recession by making investment in infrastructure. This programme is designed to cover all the major infrastructure schemes in the state pertaining to development of highways, ports, railways, airports, IT parks, power generation, etc.  Moreover, the budget is anticipating public investment of nearly one lakh crores in the next five years.

It is here the need for a fiscal space beyond the conventional limits of the budget assumes importance. The strategy is to use special purpose vehicles (SPVs) to leverage credit from the market. The first best option certainly is to increase the borrowing limits. But, the central government and hence the RBI would not allow the state government to borrow beyond the three percentage cap. This is when the central government allows the corporate sector to borrow limitlessly from the commercial banks who suffer from unprecedented accumulation of bad loans. The SPV route should be eminently acceptable to the central government because it has all the provisions to comply with the relevant prudential norms. The finance minister has explained the risks involved and the precautionary measures which the government would be taking to cover them. If the state government is allowed to go ahead with its plans, it would be ushering in a new era of using public savings for the collective good of welfare and development.