Lockdown: Kerala’s economy to contract 13.5%, revenue to take 1.35L Cr hit

There is a shortfall of ₹33,455 crore in revenue decline from the budget estimate till now and the state may suffer a loss of at least ₹1.35 lakh crore if it takes three months for normalcy to return

The fall in sale of alcohol during the lockdown has immensely contributed to the revenue loss of the state. Photo for representational purpose only: PTI

The revenue loss of Kerala for the first 47 days of the nationwide lockdown is ₹80,000 crore. The loss would be ₹1.35 lakh crore if it takes three months for the state to get back to normalcy. The estimated loss would be 1.62 lakh crore if the impact of the lockdown stays for another three months. The growth rate would fall to an all-time low of -13.56 per cent.

A study on the impact of COVID-19 on the economy of Kerala has come up with alarming facts and pointers to the future economy of the state. A state which is heavily dependent on foreign remittance, GST, sales tax and stamp duty is now going to face challenges that it has never faced in the past.

There is a shortfall of ₹33,455 crore in revenue decline from the budget estimate till now. The shortfall in GST and central tax devolution heavily contributes to this downfall. Even if the tax collection efforts remain the same, there will be a significant decline in tax and non-tax revenues due to the lockdown-induced reduction in economic activities.

The report states that for April 2020, the loss will be 90 per cent of the collection of the corresponding month of last year, as was the case in March.

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The study conducted by Gulati Institute of Finance and Taxation (GIFT), an autonomous institute under the Kerala government, has put forth a set of recommendations before the Centre and state government to address the crisis.

According to the report, ₹13,641 crore will be immediately required to support a large number of own-account enterprises and establishments in manufacturing, trade and other services. The assistance of ₹3,000 crore for the primary sector in the short run, is over and above this amount. With the additional expenditure, there would be a further increase in deficits and debt. Within the primary sector, fisheries is the severely hit one compared to crop production. The export of fish products had come to a complete halt right from the beginning of the pandemic.

The study indicates that sectors like tourism, entertainment industry such as cinema and television and travel might take a longer time to revert to normal growth trajectory, while crop production may take relatively less time.

Need for ‘revenue gap fund’

The study report proposes the Centre to set up a ‘revenue gap fund’. The revenue fall of GST would be 61.18 per cent of the budget estimate. “We don’t expect any growth in revenue,” said Dr KJ Jospeh, the director of GIFT in conversation with The Federal.

He says the burden of the state will be reduced to a great extent if the Union government agrees to compensate for the revenue loss. The report assumes that GST collection will be restored to the monthly collection of last year from November only.

“But past experience reveals that there is a huge gap in the release of compensation to states. Hence there is an urgent requirement of a ‘revenue gap fund’ to meet the shortfall of GST revenue of states over and above the compensation cess,” states the report.

The state has a consistent history of being ignored by the centre. Kerala received a very nominal share in flood relief in 2018 and was even denied the opportunity to get an aid from the UAE government. In the beginning of April, the state was the worst hit state by COVID-19 and was allocated only ₹157 crore as central aid. It was alleged that several states that did not have as many positive case as Kerala, received more aid. The report by GIFT reflects this sentiment.

What drained state’s revenues

The lockdown impact on the sale of petrol and diesel is another major factor that contributed to the revenue loss. The monthly turnover from 11 petrol bunk outlets owned by Kerala Civil Supplies Corporation for the last 11 months was taken for the purpose of the study. While March witnessed a sales drop of 29.78 per cent, it was 72 per cent in April – an indicator of the impact of lockdown on Kerala’s economy.

Kerala has the highest per capital consumption of alcohol in the country. The sale of alcohol is one of the important components that enrich the economy. Revenue from alcohol has two components: sales tax and excise duty. These two together constitute around 22 per cent of own tax revenue and 12 per cent of total revenue of government of Kerala. The average sale of liquor per day in Kerala is ₹43.12 crore.

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But, in the first 54 days of the lockdown (March 25 to May 17), the aggregate revenue loss in the sector was estimated to be ₹1,988.28 crore. However experts assume that there will be immediate recovery of demand post the lockdown.

The revenue loss from sectors such lottery, stamp and registration duty in addition to the loss from the central tax (as the entire nation is going to record the worst economic slump in the recent past) are some other factors referred in the report.

What can bring economy back on feet?

The report proposes a set of recommendations to strengthen the economy of the state through steps such as pension deferment, introduction of debt swapping schemes and enhancement of sales tax of liquor among other things.

The monthly pension expenditure comes to ₹1,900 crore for 5,38,313 pensioners. The report has proposed a pension deferring scheme for those who receive pension above ₹20,000 a month. However, sources close to the Union finance minister indicate that this proposal is most unlikely to be approved as it would invite the wrath of the public.

The study also proposes a debt swapping scheme to reduce the interest burden of the state. The debt swapping scheme capitalises the current low interest market rates by swapping some of the higher interest-bearing outstanding debts with lower interest debts, thereby reducing the interest burden of the state.

A 20 per cent hike in the excise/sales tax of liquor has also been recommended in the report. Probably this is the only area where the government does not face any resistance from the public as no political parties can openly come up with the demand that liquor must be made available cheap.

A lot of austerity measures have also been suggested in the report. Streamlining welfare payments, implementation of paid service at government hospitals for those who can afford, revision of lease rent, hike in service charges, review of post creation in government-aided schools, re-deployment of excess staff and reviewing of non-plan expenditure are a few to name.

Must dos for Centre

There is a set of demands for the Union government too.

The welfare of the migrants is the responsibility of the Union government as per Article 28 and 81 of the Union List. Kerala has been a major contributor in making India one of the largest remittance receivers in the world. It is, therefore, the responsibility of the Centre to look after the health and welfare of the migrants – the costs of their transportation, quarantine and treatment. The union government should take up this responsibility.

The lockdown till May, 17, 2020 and the prolonged shutdown of establishments in many sectors would call for a massive stimulus package. The conservative estimate calls for an immediate stimulus package of ₹17,000 crore to revive the state’s economy. The Union government may either transfer the money directly to the producers of goods and services and the workers, or give it to the state government for onward transfer to the establishments.

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The report also demands the centre for a subsidised credit scheme and flexibility in FRBM norms. It is also recommends the Centre to provide the opportunity for the resubmission of the memorandum to the 15th Finance Commission. All the states have submitted their memorandum to the 15th Finance Commission before the pandemic. Given the new context, the memorandum submitted earlier needs to be revised.

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