Kerala’s Poor Finances

Behind Kerala’s Poor Finances: High Borrowings, Low Capital Spend- Indian Express 

A recent report by Kerala Chief Minister V.D. Satheesan has highlighted the poor condition of Kerala’s finances.The report shows that Kerala is performing worse than the national average on several key fiscal indicators.

Kerala Model

• Kerala was once seen as a model of social development in India.

• Since the 1950s, Kerala had the country’s highest population growth rate.
• By the 1970s, Kerala became one of the states with the lowest population growth rates.
• Over the next two decades, Kerala achieved strong progress in social indicators such as:
  • Better health
  • Better education
  • Improved quality of life
• Kerala achieved these outcomes despite having relatively low income levels.
• In 1996, Kerala’s per capita income was only around one-hundredth of the United States, but its Human Development Index score was close to the U.S. level and much higher than India’s average.
• However, in recent years, Kerala’s model has lost some of its earlier strength because its finances have weakened.

Kerala’s Worsening Finances

• Kerala’s fiscal position has deteriorated in comparison to the national average.

• The state is borrowing more every year, but a major part of this borrowing is used for salaries, pensions and interest payments.
• This leaves very little money for developmental activities such as:
  • Health
  • Education
  • Infrastructure
  • Productive capacity creation
• Kerala’s outstanding liabilities are around 35.5% of GSDP, compared to the national average of 29.2%.
• Its interest payment is around 20.9% of revenue receipts, much higher than the national average of 12.2%.
• Its committed expenditure is around 77.6% of revenue receipts, compared to the national average of 46.1%.
• Kerala spends only 1.34% of GSDP on capital expenditure, while the national average is around 3.2%.
• This shows that Kerala is spending more on past obligations and less on future growth.

New Government Proposals

• The report suggests reducing wasteful expenditure and improving revenue mobilisation.

• It recommends creating a state-level investment attraction team, similar to the Union government’s approach.
• It proposes reducing pension expenditure by following a 10-year pay commission cycle, similar to the Union government.
• The report also highlights that Kerala has the largest number of public sector enterprises making losses.
• It recommends reforms in public sector enterprises to reduce fiscal pressure.
• The larger goal is to shift government spending from salaries, pensions and debt servicing towards productive investment and growth-generating capacity.

Kerala’s challenge is not only high borrowing but the poor use of borrowed funds. If borrowing is mainly used for salaries, pensions and interest payments, it weakens long-term growth. Kerala needs fiscal reform, better revenue mobilisation, rational expenditure and higher capital spending to revive the strength of the Kerala model.