Post Budget 2020, Kerala stares at 22% revenue cut from Central pool

An alarming financial situation has befallen Kerala even as state Finance Minister Thomas Isaac presented his budget for 2020-21 in the Assembly on Friday (February 7).

Kerala, arguably, has been one of the most affected states according to the interim report of 15th Finance Commission. In fact, all southern states have been badly affected but Kerala takes a big hit. Kerala will have a fall in revenue due to the recommendations of the Finance Commission for FY 20-21.

It is estimated to be about ₹4,300 crore as the states’ inter se share has been reduced from 2.5% to 1.943%. (Inter se contextually means the state’s share of taxes from the Union government).

Kerala is facing the crunch on two fronts – first due to the new formula which the Finance Commission has adopted for fund sharing and secondly due to the reduction of its share in the divisible pool by the Centre by tweaking taxes, just like all other states.

Kerala got about ₹22,798 crore as share in Central taxes in FY 2019-20 and the present share proposed in FY 2020-21 is about ₹15,000 crore, based on the Finance Commission calculation.

Kerala’s loss would be about 22% revenue from the divisible pool as the Finance Commission reduced its share from 2.5% to 1.9%. But if we also consider the tweaking of share of taxes and reductions of divisible pool, this becomes 31%.

The income distance formula, adopted by the Finance Commission, takes into consideration the difference between the GSDP of states. For Kerala, it is the difference between its GSDP and Haryana, the highest GSDP state.

While talking to the The Federal, Prof Abhijit Sen Former member of the Planning Commission who was also a part of the XIV FC, says, “The demographic shift might be the main reason. Shift in the population from 1971 to 2011 from southern state is the reason for its share to  go down. Fertility rate (which has been taken as a weight this time in XV FC) is not a very good correction. They have made certain  changes and they have given the TFR (Total Fertility Rate) as an index of effort to reduce population and given some weight to it But the way they have done it  is not a very good way of reflecting. For eg the 14th FC had used both 2011 and 1971. It was based on 1971 but to bring things upto date we also used 2011, if we use both of them it gives some weight to both these date,Then you can interpret that the difference between those two as which states have brought down population, instead of that they(XV FC) have only used TFR,and the way they have used TFR is used complicated and it is not very sensitive.”

While Kerala’s spending increased by about 15% over the past six years, the revenue has risen by only 10%, Dr. Isaac told the state legislature. The Union Budget’s total provision for all States is ₹7,84,181 crore. This is about 35% of the total receipt budget of ₹22,45,893 crore. This is a drastic reduction compared to what was shared in 2015-16, when the divisible pool was 42%. Now, there is a one percentage point reduction, making it 41%.

It is to be noted that this enhanced compensation was then touted as the biggest achievement towards the idea of ‘cooperative federalism’ by the then Finance Minister Arun Jaitley. Dr. Isaac, making a scathing attack on the Centre during his budget speech, said the BJP-led NDA government was ‘strangulating’ Kerala. He alleged that the Centre had been ‘helping corporates rather than the common man.’

“The Centre has been strangulating Kerala by denying funds for the state and has been moving on a self-destructive path by corporate-friendly policies and privatisation. The GST implementation has not been beneficial for the state,” he said.

Kerala needs to increase revenue receipts by 20% to ensure a sustainable growth. The Kerala budget comes a day after the state government tabled its Economic Survey 2018-19 in the House, which pegged the state’s GDP at 7.5 per cent, a marginal increase from the previous year’s 7.3 per cent.

Although it has been more than a week since the Finance Commission made its
recommendations, the fact remains that not much attention had been given to it due to too much din.

Receipt perspective

Kerala got 0.91% of the total receipt budget in 2015-16 financial year. This
year, due to the Finance Commission recommendations, this has been reduced to 0.61% of the receipt budget for 2020-21. If Kerala’s share had remained the same at 0.91%, the state would have got about ₹22,000 crore instead of ₹15,000 crore that it is getting now. So, that way, if we see from a receipt point of view, the real loss is about ₹7,000 crore. To put that figure in perspective, that is the total amount Kerala spends on its health budget alone or one-third of what it spends on education, ₹21,000 crore.

“The Centre had cut Kerala’s share of approved loan, worsening the situation aggravated by two years of floods. Coming on the back of demonetisation and GST, it had caused the present crisis” he added.

The Centre, he said, cited an increase in the fund in PF treasury accounts. “However, we had expected approval for loan of ₹ 4,908 crore from the Centre during the final quarter of the current financial year, but it gave the approval for only ₹1,920 crore,” he said.

Dr. Isaac said Kerala had been facing a huge liquidity crisis because the Centre has delayed dispensing compensation following the loss incurred due to GST implementation. The compensation, to be paid every two months, comes to around ₹1,600 crore since October last year. Despite the floods, New Delhi has not allowed Kerala to take a loan beyond the limit for the rebuilding initiative, Dr. Isaac said.

“The Centre has made it clear in this budget that they will not be able to provide the GST compensation at the existing rates. This is going to create a lot of difficulty for us. The cut in corporate taxes announced in the Union Budget will also adversely affect the state share.”

Total revenue income of the state until November 2019 was ₹55,747 crore, an increase of 1.32% over the last financial year. Tax revenue has increased by 1.30 per cent. The non-tax revenue rose to 19.22 per cent but the Centre’s share slumped by 1.63 per cent and grant-in-aid by 12.84 per cent, he said.

Steps taken

In total, there has been a dip of 8.41 per cent in revenue deficit, the minister said. To cut expenditure, project spending has been reduced by as much as 30%, he said. Bill discounting has been implemented in local bodies. Some of the bills from this year will be kept pending for next year.

No fiscal space

There is now no fiscal space left for the Kerala finance minister and that is evident from the tightrope walk that the he has done for the state budget 2020. With the state’s power to levy taxes being limited, hike in fees for services provided by government as well as more ‘sin tax’ like taxing cinemas (last year in the Budget the FM had allowed local bodies to tax up to 10% on cinemas), alcohol and cigarettes is what the government is likely to do to manage its current crash crunch.

The Final recommendations of the XV FC scheduled for the period 2020-2026  to be released on October 30th 2020,is something that Kerala has to wait keeping its fingers crossed.

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