Kerala Finance Minister interview: 'Centre holding us hostage, treating state like slaves'

The discussion around the disparity in revenue sharing among states has gained significant traction recently, with several southern states protesting in New Delhi. States like Kerala, Karnataka, and Tamil Nadu have been particularly outspoken in their criticism of the formula used by the finance commissions. They argue that the current formula unfairly rewards states that have failed to control their population growth or achieve robust economic growth.

Kerala has pursued the matter legally by filing a suit in the Supreme Court, scheduled for hearing on March 6 and 7. Earlier, the court had recommended negotiation between both parties to resolve the issue, but these attempts proved futile.

The Left government in Kerala pointed fingers at the Centre, attributing the state’s financial woes to its actions and accusing it of steering it to one of its most severe financial crises. On the other hand, the Centre argued before the Supreme Court that Kerala stands as one of the most financially unstable states, asserting that the state’s financial strain is a result of mismanagement on Kerala’s part.

In an exclusive interview with The Federal in Thiruvananthapuram, Kerala Finance Minister KN Balagopal accused the Union government of attempting to financially suffocate the state on the eve of the general elections, emphasising the dire financial situation. He highlighted that the Supreme Court is the last resort for states, and if a favourable judgement is not delivered, the situation may spiral out of control.

Excerpts from the interview

Q. The lawsuit filed by the Kerala government against the limits imposed by the Centre on its borrowing powers will again come up for hearing in the court. Despite the court's suggestion for negotiation, which proved unsuccessful, the case is significant for the state as it resurfaces.

A. In fact, resorting to the court was our last option, and the circumstances compelled our state to approach the Supreme Court to safeguard cooperative federalism, highlighting the governance incapability of the Union government and we approached the court based purely on constitutional grounds. The Supreme Court has echoed the same sentiment.

Q. But the SC refused to interfere or issue an interim order, though it recommended negotiation between the two parties.

A. Yes, but it was a futile exercise. When the SC suggested negotiation, the Centre merely paid lip service to it, displaying lack of genuine willingness. Nothing positive emerged in that namesake discussion. Currently, according to the approved plan, we are entitled to receive Rs 11,000 crore before March. However, they are insisting that we withdraw the case from the court before they release this amount, which is just like suffocating a state by holding it at gunpoint. The Centre is holding us hostage, "demanding surrender like slaves".

This is not an isolated issue. Even before us, the chief minister of Karnataka protested in Delhi alongside MPs and MLAs. This issue extends beyond party lines, affecting every state from Kashmir to Kanyakumari. The disparity lies between BJP-ruled states and non-BJP-ruled states. Every state and citizen deserves fair treatment, and it is the responsibility of the Centre to ensure the same.

Q. With Lok Sabha elections around the corner and the potential impact on welfare schemes and development activities looming, it puts your government in a difficult position. Are you suggesting there's a political bias at play here?

A. The Centre is fully aware that failing to release these funds will directly impact people. I’m clueless about the stance of the Opposition here in the state, whether they’re genuinely interested in this matter or aligned with the BJP. This situation could even affect the timely disbursement of salaries, and they seem to be targeting us right before an election.

There is a significant policy divide between the Union and state governments. The Union government has effectively rendered the Public Service Commission dysfunctional, resulting in over 10 lakh vacant positions in the public sector. Interestingly, last year, 42% of all appointments occurred in Kerala alone, indicating that Kerala is effectively managing PSC appointments. This clearly reflects the Union government's stance.

They seem to take issue with us not adhering to their approach. This could be why they’re attempting to financially strangle us, obstructing salary disbursements, and doing so strategically on the eve of an election to gain political advantage. It appears to be part of a larger agenda.

Q. How do you plan to address this situation? Are you pinning all your hopes on the Supreme Court to give a favourable verdict in the case? If the ruling does not go in favour of the state, what is your contingency plan?

A. We plan to be transparent with the public and share the facts. Unfortunately, we can't print money or take big loans. We need about Rs 25,000 crore, and more than Rs 22,000 crore was disbursed from the treasuries in March last year. Without getting the right funds, managing this amount is tough.

The state is in a tight spot, and there are no easy fixes. Our only choice is to honestly explain the situation to the people. We want them to know that this isn't a small amount that we can mobilise. It's a real crisis when such a large sum is withheld from us. That's why we took the matter to the Supreme Court. It’s not just the LDF government feeling the heat; it's the entire population. The Union government’s responsible for improving state finances, and their actions are unconstitutional. We have deep trust in the judiciary and anticipate that the Supreme Court will deliver justice.

Q. You had mentioned having a Plan B in the budget speech in case the Union government didn't change its attitude towards the state. Could you tell us what that Plan B involves?

A. In the budget speech, I did not detail a specific Plan B. What we are doing now is somewhat part of it. Presently, we are pursuing legal avenues and informing the public about our situation following the Union government's decision to impose financial restrictions on the state. We had to even organise a protest in Delhi, led by the chief minister, which is an unusual step for a government. These actions aren't typical of the financial interactions between states and the union. We feel suffocated and compelled to take these measures.

Q. What immediate impact does the borrowing limit of 3.5% of the GSDP have on the state? How do you justify opposing such a regulatory measure implemented by the Union government?

A. We don't have any issues with the Fiscal Responsibility and Budget Management (FRBM) Act of 2003, which restricts everyone from irresponsible and excessive borrowing after the nineties. This applies to both states and the Union government. However, the Union government is borrowing at 6.4% of the GDP, expecting it to decrease to 5.1% and so on.

Last year, we were only allowed to borrow up to 2.4% of the GSDP. Although the cap is set at 3.5%, they reduced it citing our previous borrowings. Isn't the cap also applicable to the Union government? They are borrowing almost double the allowed amount. The fiscal deficit of the Union government this year is Rs 17,00,000 crore. Kerala wouldn't require such significant borrowings if tax shares were distributed fairly. If we were to receive our share similar to what we have been getting during the 10th Finance Commission, our needs could be covered with only 2% borrowing.

Kerala's share in this divisible pool has declined from 3.875% during the 10th Finance Commission to 1.925%. This year, it amounts to around Rs 21,000 crore at 1.925%. If it were still at 3.875%, it should have been Rs 42,000 crore, nearly double the current amount, which represents a significant disparity. The state’s portion of the Central tax revenue pool, previously at 42% during the 14th Finance Commission, has now decreased to 41%.

The policy of treating the liability of institutions like KIIFB, Social Security Pension Limited, etc., which raises funds from outside the budget as the liability of the state government is also limiting our borrowing capacity. There will also be a shortfall of Rs 3,100 crore on this account. Due to the restriction on the market borrowing limit, there has been a shortfall of around Rs 4,000 crore in resource mobilisation.

Q. The widespread allegation among the Opposition, whether it's from the BJP-led Union government or the Congress-led Opposition in the state, is that your government's inability to generate revenue or effectively collect taxes is the root cause of the financial crisis. How do you respond to this accusation?

A. Kerala is actively pursuing strategies to bolster revenue while trimming unnecessary expenditures. Both the finance ministry and the reserve bank have recognised Kerala's commitment to financial consolidation and revenue augmentation.

Among all states, Kerala stands out with significant revenue growth. In the aftermath of COVID-19 in 2021, our state's tax revenue reached Rs 47,000 crore. Within just two years, we've surged to Rs 77,000-78,000 crore, marking a remarkable increase of Rs 30,000 crore. Achieving the Rs 47,000-crore milestone took over 65 years post-Independence, yet we've achieved substantial growth in just two years. Looking ahead, we aim to double this figure within the next four years.

This is achieved through increasing economic activities. But this can't be continued. The increase in activity has a limit. We have done everything we can to increase revenue as well as curtail unnecessary expenses. What they suggest is to slash funds for welfare schemes, health projects, schooling, and projects like the Life Mission, which is successfully implemented only in Kerala. This is not acceptable to us. Kerala is on top in terms of human development indices because of these. We are on top of 24 indices in the country because of our spending. We see this as capital expenditure.

Kerala saw a record increase in tax collection, which shows our efforts are yielding results. We're tackling new forms of tax fraud with innovative investigation methods. However, the fundamental issue remains the denial of our rightful share by the Union government, a concern echoed by leaders like Karnataka CM Siddaramaiah and his deputy DK Shivakumar.

Q. Your budget included proposals for corporate investments in education and health, as well as opening doors to foreign universities to turn the state into an education hub. However, it seems that these plans are facing opposition within the party due to ideological differences. What is the current status of these proposals?

A. We're not only focusing on the education or health sectors but are also actively seeking investment in various areas like ports, tourism, and healthcare. In my budget speech, I mentioned that the government would “examine” the possibility of allowing foreign investment in higher education. However, this wasn’t a definitive decision; it’s something we need to discuss further. We don’t have a policy against even considering it.

Our goal is to elevate Kerala's educational sector to the top in the country while also attracting investment. It's not just about foreign investment; it's about enhancing the quality of education in the state. Although we can't stop all students from going abroad – only about 4% of total migration happens from Kerala – we can create a high-quality educational environment here. This will not only attract students from other states but also from other countries.