People's Democracy

Kerala Budget Displays Political Will 

To Confront Neo-Liberal Policies

R Ramakumar

ONE major feature of the era of neo-liberal economic reforms in India has been the increasing concentration of governing powers with the central government relative to the state governments. This feature has tied the hands of state governments further, given that the powers of states to undertake progressive social changes are already circumscribed by the constraints of the Indian Constitution. The central government has been using these powers to force states to implement its neo-liberal policies. For instance, the central government has been using the successive Finance Commissions towards this end by linking resource transfers to successes with fiscal adjustment. Similarly, the introduction of VAT scheme has been a direct assault on the rights of states to raise revenues by imposing higher taxes on luxury goods. The structure of the interest rate system for loans is highly biased against the states vis-à-vis the centre. What is unfortunate is that most states have surrendered to these pressures and implemented neo-liberal ideas of fiscal contraction in their budgets.

An associated feature of the reduced autonomy of states in decision making has been the sharp deterioration in the finances of Indian states. Deficits and debts of states have risen significantly, primarily due to the inadequacy of the volume of statutory transfers of resources to the states relative to their growing financial commitments. Gross devolution and transfers from the centre to states, as a share of GDP, declined to 5.7 per cent in 2005-06 from 6.8 per cent in the early 1990s. The fall in the financial health has seriously undermined their ability of states to meet rising obligations in social services. 

Given these constraints, Kerala’s revised budget for 2006-07, presented by finance minister T M Thomas Isaac in the state assembly, has demonstrated a rare political will through its efforts to thwart attempts by the centre to thrust neo-liberal policies on states as well as concurrently use the limited freedom available for states to develop alternative policies.

REJECTION OF DRACONIAN LAWS

One of the most significant aspects of the budget is its rejection of the “Kerala Fiscal Responsibility Act 2003”, passed by the UDF government. The fiscal responsibility legislations passed in the 1990s by the parliament and state legislatures are some of the most draconian economic legislations in India today. These legislations have stipulated that the levels of revenue deficit and fiscal deficit in state budgets should not exceed pre-specified limits. To set targets for how much a government should spend for the welfare of its people is fundamentally an irrational idea. In an economy with a large poor population, the State has definitely to be the major player in undertaking investment, regulating the economic agents and preserving public institutions of welfare. To fulfill these functions, the Indian State actually needs to spend more, not less. To stipulate limits to spending where actually more spending is required is to effectively sabotage social progress.

The new budget has rejected this Act as impractical and anti-people. It has pledged to amend the Act in ways that keep with the spirit of the LDF manifesto. The position of the LDF has been that a solution to the fiscal crisis has to be revenue-led and not based on deficit-targeting. It is certain that the decision to amend the fiscal responsibility legislation would attract hostile reactions from neo-liberal policy makers at the centre. There are fears that the centre may resort to cuts in resource transfers to Kerala. However, the LDF government is getting ready to lock horns with the centre on this issue. At the core of the dispute would be the question whether a democratically elected state government can be denied constitutionally provided resource transfers owing to its refusal to reduce spending for the welfare of its people. To be sure, the success of the proposed legislative change in Kerala is contingent on the mobilisation of mass support in its favour across the country.

FOCUS ON REVENUE MOBILISATION

As mentioned, the focus of the revised budget is on revenue mobilisation. States in India have very limited space and freedom to raise adequate revenues to fulfil their social functions. Such a freedom is contingent on a radical reform of centre-state relations. The political message from Kerala’s budget is that governments should display strong political will to tax richer sections and luxury goods in order to mobilise revenues. 

According to Thomas Isaac, Kerala would try to raise the share of revenue receipts to NSDP from the present 13 per cent to 17.5 per cent by 2010 (after implementing the Pay Commission report). The budget expects to mobilise revenue through major reforms in tax administration and a mass mobilisation campaign among people to overcome the tax resistance mindset. Thomas Isaac said he was inspired by the popular movement for mobilising tax revenues in Venezuela, which helped to raise the tax-GDP ratio significantly. 

The budget has raised the taxes on many luxury items. A new schedule of luxury goods taxable at 20 per cent has been announced, which includes “health drinks,” mineral water, and aerated soft drinks such as Pepsi and Coca-Cola. A per head tax has been imposed on members of luxury clubs. Calling for a fairer share for the government of the prosperity in the tourism sector, the budget has made many tourism-related items taxable. The tax on gold has also been raised. Importantly, it has been announced that the government would not disinvest or sell any profit-making PSU to raise revenues. 

Yet another way in which the centre has been hijacking the freedom of states in policy making is through the VAT system. The VAT system has been an assault on the rights of states to raise revenues by imposing higher taxes on luxury commodities. Before the introduction of VAT, a number of luxury commodities used to attract a high tax rate of over 20 per cent. However, with the introduction of VAT, there was a reduction in the incidence of tax on luxury commodities from above 20 per cent to just 12.5 per cent. This has resulted in a sharp fall in tax revenues of the Kerala government. In the last year, this loss has been estimated to be Rs 693 crore. 

To correct this anomaly in centre-state relations, the budget has demanded a major change in the existing VAT design. The budget has demanded treatment of VAT rates as only floor rates, so that states would have the right to charge higher rates on selected goods. If accepted by the centre, this measure would also improve the capability of states to generate higher revenues.

TACKLING THE AGRARIAN CRISIS

Another important area where the budget has made bold efforts to design autonomous policies is agriculture. The agrarian crisis in parts of Kerala has adversely affected the livelihoods of thousands of farmer households. The proximate cause of the crisis is the sharp fall in prices of tea, coffee, pepper and cardamom. The solution to this problem is, of course, complicated and beyond the control of the state government. On its side, the central government has not taken any serious initiative to address this problem. It has refused to revise its policies of agricultural trade liberalisation, ensure the availability of agricultural inputs to farmers at reasonable prices and raise the levels of public investment in agriculture. The National Commission for Farmers (NCF) has recommended a number of short-term measures to arrange relief to the farmers. The adoption of these measures has been a major demand put forward by the All India Kisan Sabha in the recent months. 

Even though the centre has continued its go-slow policy on the agrarian crisis, the state government’s budget has displayed a commendable responsibility in taking relief to the farmers to the maximum extent possible. It has also tried its best to implement many of the recommendations of the NCF. 

First, an Agricultural Debt Relief Commission is to be formed. This commission would be a quasi-judicial body with powers to declare a region or a crop in a region as calamity-affected and submit proposals for debt relief. It would have powers to cancel usurious loans from private moneylenders once and for all, and with no compensation. As Thomas Isaac mentioned in his speech, Kerala would be the first state to constitute such a commission.

Secondly, a Farmer’s Commission is to be constituted. The formation of a Farmer’s Commission for each state is a recommendation of the NCF. This commission would suggest measures to ensure agricultural price stability and raise agricultural investment in the state. A Price Stabilisation Fund would be set up and the commission would guide the activities of the fund. 

Thirdly, the state’s budget has seriously explored the possibilities of adopting another important recommendation of the Swaminathan Commission: the reduction of annual interest rates on crop loans to 4 per cent. It has been declared that the government could consider providing crop loans at 4 per cent as an incentive for repaying loans at the right time.

Fourthly, the budget has exempted farmers cultivating tea, coffee, pepper and cardamom from agricultural income tax for one year. Coconut and coconut products have also been exempted from all taxes for a year. 

Fifthly, the government would continue with the scheme for supplying rice through PDS at Rs 3 per kg. By continuing to subsidise the PDS, the LDF government has signalled its strong commitment to the maintenance of food security in the food-deficit state.

Thus, a number of features keep Kerala’s new budget apart: the confrontation with the neo-liberal policies of the central government; the struggle to regain the freedom of states in policy making; and the efforts to design alternative policies working within the threats posed by globalisation. The new budget, along with the other initiatives of the LDF government, should act as a major inspiration for the struggles of the Left against neo-liberal policies.