Kerala, considered a leading State in terms of welfare provision, has been in the news recently following the death by suicide of a differently abled man who did not receive his monthly pension of ₹1,600 on time. The State government claims that it is unable to discharge its welfare obligations, of which pensions are only a part, as it is restrained by the Government of India from borrowing to fulfil them. It has petitioned the Supreme Court to arbitrate on the issue of whether the Centre can so constrain States. It would seem that in a federal polity the Centre has no authority to overrule States’ decisions on matters related to their own finances, except where the Government of India guarantees the loans of State governments. Anyway, the Supreme Court’s ruling on the matter should be out soon, and the constitutional validity of Central limits on further borrowing by the Government of Kerala would be settled. But legality is not the crucial question here. It is the economic rationale for Kerala accruing more debt at this juncture.
It may be thought that Kerala’s fiscal challenge is due to its unusually high spending on public services. Actually, Kerala is not the State that spends the most on welfare. In 2022-23, per capita public spending on ‘social development and economic services’ was four times higher in Goa than in Kerala. While the share of Central taxes in total revenues is greater for Goa than it is for Kerala, it is not much higher. The real difference is made by the fact that Goa mobilises more resources than does Kerala. In 2022-23 its per capita own tax revenue was 2.1 times that of Kerala and per capita non-tax revenue was 4.6 times. It is also significant that Goa has in most years of late funded public services from its revenue receipts.
Spotlight | Woes of those who wait for social security pension in Kerala
But resource mobilisation is not the only factor underlying the large difference in the per capita expenditure on social and economic services between the two States, classified as ‘development expenditure’ in the Kerala budgets. For 2023-24, Kerala’s non-development expenditure is budgeted to be greater than its development expenditure. It is the only State for which per capita non-development expenditure is greater than per capita development expenditure. The main elements of non-development expenditure are interest payments, administrative services and pensions. In the revised budgetary estimates for 2023-24 each one of these is higher than every item of development expenditure, including economic services. Finally, a mysterious entry titled ‘Miscellaneous Department’, listed under non-development expenditure, dwarfs every item of development expenditure bar education. It exceeds spending on medical services including public health, agriculture, industry, and community health. So, there is an undesirable skewness in the allocation of public expenditure. Then there is the legacy burden of interest payments which take up close to a fifth of the revenue receipts of Kerala. This is twice the figure for Goa and lowers the capacity for welfare provision.
We now have enough information to evaluate whether Kerala should increase its public debt. To repeat, the State government’s claim is that it cannot maintain its welfare schemes due to an embargo on borrowing by the Centre. There is indeed a reduction in Central grant-in-aid to the State for this year, and the borrowing proposed in the budget for 2023-24 is approximately of the same magnitude. However, what Kerala should do under the circumstances is dictated by the principles of public finance. A historically high revenue deficit of 2.1% is projected for the current year. This implies that the State is already borrowing to fund non-revenue-generating expenditure. To now borrow more for the same purpose does not make economic sense, even if Kerala were not already the State with very high debt per capita and debt in relation to its income.
Also read | The ‘Kerala Model:’ a mixed bag of successes and spectacular failures
The Kerala government has done the right thing to air its dissatisfaction with the Modi government’s authoritarian approach to Centre-State fiscal relations. However, to meet its welfare obligations it must restructure its finances, including paying down debt, so that interest payments take up less of revenue. This implies simultaneously raising revenue and trimming expenditure. A welfare state needs sturdy financial foundations, for you can only cut the coat according to the cloth.
Pulapre Balakrishnan is an economist
