Question

What difficulty does the Kerala government face concerning its finances?

• A. Ease in balancing revenue and expenditure without borrowing.
• B. Difficulty in balancing revenue and expenditure, often resorting to high levels of borrowing.
• C. High revenue surplus due to low expenditure.
• D. Minimal need for borrowing due to strong tax collection.

Answer 1

Answer:

B. Difficulty in balancing revenue and expenditure, often resorting to high levels of borrowing.

Understanding Kerala's Financial Challenges

• Persistent Revenue-Expenditure Mismatch: Kerala consistently faces a significant gap between its own revenue generation and its increasing expenditure, leading to a perennial fiscal deficit. This imbalance necessitates borrowing to meet financial obligations.
• High Levels of Borrowing: To bridge the revenue-expenditure gap, the state government frequently resorts to substantial borrowing from various sources, including open market borrowings, loans from central financial institutions, and special purpose vehicles. This leads to a rising public debt.
• Dominance of Revenue Expenditure:
  • Salaries and Pensions: A substantial portion of the state's budget is allocated to the payment of salaries and pensions for government employees and retired personnel, which are committed expenditures.
  • Welfare Schemes: The 'Kerala Model' of development emphasizes extensive social welfare programs, including public healthcare, education, and various social security pensions. These schemes, while beneficial, demand significant and recurring financial outlays.
  • Debt Servicing: A growing part of the expenditure is dedicated to servicing existing debt, which includes interest payments and principal repayments, further straining the state's finances.
• Challenges in Revenue Generation:
  • Dependence on Consumption Taxes: A significant portion of Kerala's own tax revenue is derived from consumption-based taxes like the Goods and Services Tax (GST). Revenue growth from these sources can be volatile and dependent on economic activity.
  • Limited Diversified Economic Base: While the service sector and remittances from Non-Resident Keralites (NRKs) contribute significantly to the state's economy, their direct translation into robust government tax revenue is limited compared to a strong industrial or manufacturing base.
  • Share from Central Pool: Kerala's share of central taxes and grants-in-aid is determined by the recommendations of the Central Finance Commissions. States often argue for a higher devolution of funds from the central government.
• Fiscal Responsibility and Budget Management (FRBM) Act: Like other states, Kerala has its own Fiscal Responsibility and Budget Management Act, which aims to set targets for fiscal deficit, revenue deficit, and public debt. However, consistently adhering to these targets remains a significant challenge due to the structural issues in its finances.
• Impact of High Debt Burden: Elevated levels of borrowing lead to a high Gross State Domestic Product (GSDP) to debt ratio, which can raise concerns about the state's long-term fiscal sustainability. A larger share of borrowed funds often goes towards meeting revenue expenses rather than capital expenditures (like infrastructure development), which are crucial for future economic growth.