“The previous government had announced schemes in the budget without checking if the treasury had enough money. They borrowed more than they could afford to roll out the projects. Even as expenditure shot unusually, there was no attempt to increase revenue. Tax collection was flawed. The tax collection should have increased at least 20 per cent but only 10-12 per cent was increased,” read the white paper issued by the Left Democratic Front government as soon as it came to power last year.
Ironically, the critique of the United Democratic Front government reads as an indictment of the current government. The treasury is almost drained and the government has not thought of reducing its borrowing. Yet the government is not able to rein in the expenses or increase tax collection despite promising a host of incentives.
Finance minister T M Thomas Isaac had been counting on the Goods and Services Act to increase Kerala’s tax revenue. He is a disappointed man now. The state can only fall back on the compensation the central government has announced as part of the GST.
The state is heading for a financial crisis thanks to the lavish spending of the money it received during the previous Onam. The government borrowed Rs 8,500 crore from the open market for general expenditures but spent Rs 6,500 on salaries, bonuses, festival allowances, pensions and welfare pensions. The government must have spent about Rs 12,000 crore during the period.
The expenses may be inevitable but the government erred in not tightening the belt in anticipation of the impending crisis.
The GST letdown
The state government has several factors to blame for the crunch. The state’s tax revenue was dented by the introduction of the GST. The shortfall was expected to have been addressed by the central government but about Rs 1,200 crore is yet to be received. The central government will not pass on the sum until after two months.
The state government was pushed deep into red when it was required to pay Rs 750 crore as pensions last month as part of the second installment of the due under the pay reforms. The treasury has been bled white.
The previous governments had a leeway until the end of the financial year, when the expenditures actually started picking up. The early approval of funds for projects this year has added to the cash outflows.
The government had to repay Rs 800 crore to meet its debt obligation from a decade ago. The repayment earlier this month resulted in a sudden drop in the state’s resources.
The government will need Rs 1,500 crore to distribute welfare pensions during Christmas. It also has to find a way to pay salaries and pensions for two months. The total bill will run to Rs 5,000 crore. The government can expect additional expenses of Rs 3,000 crore in December.
The tightening strings
The finance department has already send out directions to the treasuries not to pass any bills more than Rs 25 lakh.
The government is yet to pay Rs 1,400 crore to the contractors. The contractors cannot be guaranteed when they will get the money. The uncertainty adds to the problems faced by the contractors due to the GST, which forced them to protest.
The uncertainty is sure to stall development projects run by local self-government bodies.
The government may seek alternative methods to prop up its finances. Citizens can expect more rigorous checks by the police and the motor vehicle inspectors on road. You may be forced to pay your dues in taxes and fines.
The government has to collect a total of Rs 12,000 crore in unpaid taxes. This includes Rs 7,582 crore in commercial tax, Rs 2,793 crore in land recovery, Rs 1,765 crore from the motor vehicles department (The Kerala State Road Transport Corporation owes Rs 1,433 crore of it), Rs 241 crore from the excise department, Rs 313 crore from the land revenue and Rs 28 crore from the registration department.
The LDF government is committed to the timely payment of welfare pensions but the finance department seems to have miscalculated the amount it needs to pay. The government had to pay Rs 2,300 more than the budgetary allocation for the disbursement of welfare pensions.
The cost of public distribution also overshot the budget by Rs 45 crore. The KSRTC was paid Rs 300 crore extra.
The creation of 21,000 government jobs since the LDF came to power has also put a strain on the treasury.
The government may be sticking to the LDF’s election manifesto but spending more than budgeted for is surely not a sign of sound fiscal management.
The LDF government inherited a public debt of more than Rs 1 lakh crore. The debt has increased to Rs 1,21,183 crore by last December, as per the latest report by the accountant general. The government added to the pile by borrowing Rs 8,500 in August. Now the total debt stands at Rs 1,29,683 crore.
The central government has capped borrowing at Rs 18,524 crore this financial year. The Kerala government is not allowed to borrow until January.
The state government is left with no option but to rein in its expenses until it is fit to borrow again. A lion’s share of the borrowing anyway goes to day-to-day expenses.
The treasuries have been ordered to spend in accordance with revenue. The treasuries have been asked to half their daily limit of withdrawal to Rs 50 crore.