Kerala, a state grappling with significant debt, could encounter difficulties in achieving the fiscal deficit goal outlined in the forthcoming annual budget, warns a rating agency. The recent presentation of the annual budget by the Left Democratic Front government in Kerala highlights revenue and fiscal deficit projections at Rs 23,942 crore (2.1% of the gross state domestic product) and Rs 39,662 crore (3.5% of the GSDP) for the fiscal year 2023-24.
Borrowing Battles and Fiscal Strains
The Kerala government has taken its grievances against the Union government to the Supreme Court, contesting the imposition of limits on the state’s borrowing capacity. The initial legal action was initiated under Article 131 of the constitution, granting the Supreme Court original jurisdiction to adjudicate disputes between a state government and the Union government.
Expressing concerns, the Kerala government contends that the Union government’s decision to reduce its borrowing capacity severely threatens its financial stability. Regulations governing such borrowings are outlined in the Kerala Fiscal Responsibility Act, 2003.
The state’s legal challenge targets letters issued by the Union finance ministry on March 27 and August 11, along with amendments to Section 4 of the Fiscal Responsibility and Budget Management Act, 2003, enacted through the Finance Act, 2018. The Kerala government argues that these actions interfere with its rights to borrow from various sources, including open market borrowings.
Additionally, it claims that the Union government has further restricted its borrowing powers by categorising specific actions as “borrowings” under the definitions of Article 293 of the constitution, actions that are not perceived as such.
Tensions escalated on November 25 when Union Finance Minister Nirmala Sitharaman, during her visit to Thiruvananthapuram, refuted allegations of negligence in disbursing funds to Kerala. According to Sitharaman, any withholding of funds was attributed to the state’s failure to meet essential criteria. She further mentioned that the Pinarayi Vijayan government could pursue legal recourse. Still, it would only provide another platform for her to clarify “what the story is really.”
The Kerala government emphasises the urgent need for approximately Rs 26,000 crores in legal proceedings to avert an imminent financial crisis.
Beyond the political theatrics, the financial challenges facing Kerala seem undeniably substantial. The Left Democratic Front (LDF) government asserts that the Centre is “financially choking” Kerala for political advantage. At the same time, the Opposition, led by the Congress-led United Democratic Front (UDF), scrutinises the state government for its perceived extravagance.
Recent struggles meeting obligations to social security pensioners and farmers have further accentuated Kerala’s fiscal strain. Critics point to the roots of these challenges, highlighting the pay revision for government employees announced in 2021 as a contributing factor. Notably, the revision was implemented retrospectively from July 1, 2019.’
Kerala’s Fiscal Landscape
At the current trajectory, the fiscal deficit is poised to hover dangerously close to the 3% limit of the Gross State Domestic Product (GSDP), with an additional 0.5% contingent on central government conditions, as indicated by India Ratings.
The rating agency foresees higher figures for revenue and fiscal deficits, projecting them to be 2.4% and 3.9% of the GSDP in the upcoming fiscal year. The agency attributes this trend to a shortfall in revenue receipts and an inflated nominal GSDP growth.
The state’s revised revenue deficit for the ongoing fiscal year is Rs 19,916 crore, equivalent to 2% of the GSDP. This contrasts with the budget estimate of Rs 22,968 crore or 2.3% for the fiscal year 2022-23.
Benefiting from a robust 12.2% nominal Gross State Domestic Product (GSDP) growth in the ongoing fiscal year, revenue receipts in Kerala have surged by 10.8%. This growth outpaces the annual expansion of 2.1% in current expenditure. As per the revised estimates for the fiscal year, the fiscal account is anticipated to witness an improvement.
The fiscal deficit is projected to decrease to Rs 36,764 crore, equivalent to 3.6% of the GSDP, in contrast to the budgeted Rs 39,117 crore, or 3.9%. This positive development surpasses the agency’s earlier estimate of 4.4%, attributed to the higher-than-expected nominal GSDP and strategic expenditure reduction.
The Finance Minister is actively working to address the deficit resulting from lower revenue receipts by carefully managing and cutting down on expenditure.
The central premise of the budget proposal hinges on the expectation of an 11.2% nominal Gross State Domestic Product (GSDP) growth for FY24, as per the agency’s assessment. However, given the state’s historical trend of 10% between FY15 and FY20, the agency deems this projection ambitious. Consequently, the agency anticipates a more realistic nominal GSDP growth of 10.5% for FY24.
The 2023-24 State budget underscores a significant fiscal challenge for Kerala. The document reveals that while ₹46,754 crore was required for salary and pension disbursement in 2020-21, the demand surged to ₹71,393 crore for 2021-22. This indicates an additional commitment of ₹24,000 crore assumed by the government.
To navigate this crisis, Kerala must exercise stringent control over expenditure. It becomes crucial to leverage positive trends in our revenue, which exhibited growth from ₹58,300 crore in March 2022 to ₹71,900 crore in March 2023. Furthermore, a compelling presentation of its case before the 16th Finance Commission is deemed essential to reclaim the fiscal space that Kerala contends to have lost.
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