People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 12

March 23, 2008


Kerala’s Budget for 2008-09

Towards Healthier Finances And Equitable Growth

R Ramakumar

TWO years ago, while presenting the first budget of the new LDF government in Kerala, finance minister T M Thomas Isaac had outlined the broad contours of an alternative vision of managing the States’ finances in the neo-liberal era. He had underlined that neo-liberal policies at the centre had sharply shrunk the autonomy of the States in designing alternative economic policies, and that a struggle to drastically restructure centre-State economic relations was an essential political task. Nevertheless, it was stated that Kerala would strive to use the limited autonomy available to resist compressions in welfare expenditures and raise the tax-GSDP ratio through innovative measures of revenue collection and checks on tax evasion.

While presenting his third budget for the year 2008-09, Thomas Isaac did a detailed review of the State’s finances. He argued that, contrary to the myths perpetrated, there was a noticeable improvement in the health of the States’ finances over the last 2 years. The States’ public debt as a share of the GSDP had declined from 39.1 per cent in 2005 to 37.6 per cent in 2007. The annual rate of growth of GSDP at 12 per cent was substantially higher than the average interest rate of 8.75 per cent on public debt, indicating a slow, but gradual, movement out of a debt trap. The share of interest payments in revenue expenditure had declined from 21.5 per cent in 2003-04 to 17.9 per cent in 2007-08. The States’ finances had ceased to be in primary deficit, and had actually recorded a primary surplus in 2007-08.

Alongside a fall in the burden of debt, there was a major increase in the revenue collections of the State in the last 2 years. The States’ own tax revenue had increased by 22.1 per cent in 2006-07 and 17 per cent in 2007-08 over the previous years, while the average rate of annual increase in the early-2000s was only about 9 to 11 per cent. The States’ tax buoyancy rate (that indicates the percentage rise in tax revenue for every one per cent rise in GSDP) had risen from the average of 1.1 per cent in the last five years to 2.1 per cent in 2006-07. There was also an increase in the collection of tax arrears in the last two years.

The overall impact of the fall in debt burden and rise in revenues has been the containment of the revenue deficit at manageable levels. The revenue deficit as a share of GSDP declined from 4.77 per cent in 2002-03 to 1.99 per cent in 2006-07. There was a qualitative distinction between the neo-liberal conception of revenue deficit reduction and the reduction of revenue deficit achieved in Kerala. In Kerala, the revenue deficit was reduced not by unilaterally withholding or cutting down on welfare expenditures. Instead, this was achieved by consciously raising revenues on the one hand and judiciously raising expenditures on welfare programmes. In fact, the budget for 2008-09 presented by Thomas Isaac on March 6, 2008 envisages a major step up of public expenditure in the social sector by making use of the improved state of revenue collections.

Towards strengthening

social security

A specific feature of Kerala’s developmental experience has been its historical commitment to maintaining a minimum social security cover for its vulnerable population, majority of whom are employed in the unorganised sector. Kerala’s welfare fund model of social security is well acclaimed. The contemporary challenge of neo-liberalism presents the State with two important tasks – to expand the cover of the social security system to include the newly vulnerable sections and to improve the efficiency of service delivery in the existing systems so that they can be financially sustained. A significant announcement in this year’s budget, which was widely welcomed, was a substantial increase in pensions to unorganised workers from the welfare funds (as well as for the physically disabled and mentally challenged persons) from Rs 100-130 per month to Rs 200 per month. This measure is to benefit about 10 lakh worker households in the State. The Minister also announced that all the existing arrears on pension payments to the poor have been cleared as on March 2008.

Another important announcement in the budget is the initiation of a Fisherpersons Debt Relief Scheme. Fisherpersons have historically remained as “outliers” to Kerala’s general social advancements, and the levels of poverty and indebtedness among them are substantially higher than the State average. The new debt relief scheme is expected to contribute significantly to improving the livelihoods of fisherpersons in the State.

To meet the States’ 11th Plan target of providing free health care to the poorest 30 per cent of households, the budget has launched a “Kerala Comprehensive Health Insurance Scheme”. This scheme is to be linked to the central government’s health insurance scheme, which unfortunately covers only the BPL households. However, Kerala is to expand the coverage of insurance from only BPL households to all households interested in the scheme. Most importantly, this scheme is to be fully integrated with the public health system in the State in order to increase its reach and accountability. Given the increasing importance of health costs in rural household expenditures, this scheme is expected to go a long way towards smoothing the expenditures of vulnerable households in the State.

There are also special interventions to improve the state of public health in the State. A pilot scheme has been launched to provide food at Rs 2 per head in public hospitals. Special support has been announced to institute systems of special care for patients discharged from hospitals with chronic incurable diseases.

Being a food deficit State, the importance of PDS to Kerala is paramount. It is well known the policies of the centre have systematically weakened the PDS over the years. In this context, the budget has announced a strengthening of intervention measures in the market to check rise in the prices of food. The ration subsidy has been raised, and it has been announced that there would be no upper limit on expenditures to maintain the PDS and check the rise in food prices.

addressing agrarian

distress AND raising

agricultural growth

One of the signal achievements of the LDF government after 2006 has been a near total end to farmers’ suicides. This achievement was primarily driven by a spread of trust among peasants in the government. In 2006, the government took over the debts of households where suicides had taken place. For the first time in India, an Agricultural Debt Relief Commission was set up in 2006 that was empowered to write-off informal sector loans and recommend relief on formal sector loans. These measures, undertaken 2 years before the much delayed debt waiver scheme of the central government, were central to the sharp fall in the number of farmers’ suicides in Kerala.

The present year’s budget at the centre has ignored the long standing demand of the peasantry to institute a Price Stability Fund at the national level. Apart from the inadequate scheme of debt waiver, very little has been announced in the central budget to support agricultural production. However, in a welcome measure, Kerala’s budget has announced the introduction of a Price Stability Fund in agriculture with limited resources to begin with and a promise to raise it in the next year. A pilot scheme to introduce a welfare fund for farmers (just as for workers) has also been announced in the budget.

Restructuring public

sector industries

The turnaround in the performance of a large number of loss-making public sector industrial units is yet another achievement of the LDF government in the last 2 years. Moving away from the Congress policies of suffocating these units to death and finally selling them off, the LDF government encouraged the restructuring of these units through specially designed packages, infusing more capital from budgetary resources and allowing more autonomy in management. While in 2005-06, all public sector units in Kerala recorded a net loss of Rs 90 crores, there was a net profit of Rs 20 crores in 2007-08. The number of profit making units increased in this period from 12 to 24. This years’ budget has set apart separate funds to the tune of Rs 50 crore to further modernise and restructure public sector industrial units. In order to help the Kerala State Road Transport Corporation restore its financial health, the budget has announced a waiver of its Rs 700 crore of tax arrears to the government. Also, to help restructure sick private sector units, the government is to establish a counterpart of the centre’s Bureau for Industrial Finance and Restructuring.

Additional revenue


New measures have been announced in the budget to accelerate the collection of tax arrears to the government, estimated to be between Rs 150 and Rs 200 crore. Further, urgent steps are to be taken to vacate judicial stays on tax arrear collections. New compounding schemes on tax payments have been offered to sectors where a huge gap exists between potential and actual tax collections.

In order to meet the increased financial commitments in the social sector, a one per cent cess has been imposed on sales taxes and value added taxes levied by the State government. The budget hopes to raise an additional Rs 100 crores by this measure. Also, surcharge of 10 per cent has been imposed on the big retail chains, including direct marketing chains, who import more than 50 per cent of goods from outside the State, whose turnover exceeds Rs 5 crore per annum and whose direct sales to the consumer exceeds 75 per cent of total sales.

The political stance

of the budget

Budgets of Left governments in India are not simple accounting exercises. They are political statements on how to strengthen struggles to restore freedoms for autonomous policy making at the State-level as well as on how best to bring relief to the poor and vulnerable. Kerala’s budget does not entertain any illusion about a sustainable turnaround in the States’ finances in the absence of larger changes in centre-State economic relations. It specifically points out that while Kerala received 3.9 per cent of central tax revenues as its share during the 10th Finance Commission, the corresponding share was only 2.7 per cent during the 12th Finance Commission. In absolute terms, this represented an approximate annual loss of Rs 2100 crore. It criticises the tendency of Finance Commissions to set fiscal adjustment-related conditionalities over central transfers. In this background, Thomas Isaac has announced the convening of a State Finance Ministers’ conference in Trivandrum on May 5-6, 2008 to discuss a joint framework of action against centralising tendencies in economic policy.

Kerala’s budget for 2008-09 lives up to the promises made by the LDF government in 2006 to strive to bring maximum relief to people, even while functioning under the constraints imposed by neo-liberalism. The widespread affection with which the budget was received by diverse sections of Kerala’s society was evidence to the growing public support for the political stance of the LDF government and its developmental policies.