Why the Kerala economy is under the spotlight


The state's GSDP has registered a robust growth of 12.01% in post-pandemic 2021-22, mainly driven by rapid growth in tourism-related segments such as hotels and restaurants.  A boat race held at Ashtamudi Lake in Kollam.

The state’s GSDP has registered a robust growth of 12.01% in post-pandemic 2021-22, mainly driven by rapid growth in tourism-related segments such as hotels and restaurants. A boat race held at Ashtamudi Lake in Kollam. | Photography: Suresh Kumar. C

EEarlier this month, Kerala Finance Minister KN Balagopal met Union Finance Minister Nirmala Sitharaman in New Delhi and sought her urgent intervention on “various issues affecting the state government’s financial situation in recent times”. Among others, Mr. Balagopal sought an increase in the state’s open market borrowing limit by 1% of the Gross State Domestic Product (GSDP), special assistance of ₹ 3,224.61 crore for capital investment and compensation for the pending Goods and Services Tax (GST) exemption. He also confirmed the State’s request to extend the GST offset period by at least five years until tax measures stabilize revenue. Other States have also requested this.

A recurring theme in the controversies of the Left Democratic Front government is that the Center’s unfair fiscal policies have left the southern State in financial limbo. But for now, there are other reasons why Kerala’s economy is under the spotlight.

The state’s GSDP has registered a robust growth of 12.01% in post-pandemic 2021-22, mainly driven by rapid growth in tourism-related segments such as hotels and restaurants. This is also higher than the national growth rate, which was 8.7%. The domestic production, which was valued at ₹ 7,99,571 crore in 2020-21, increased to ₹ 9,01,998 crore in 2021-22, indicating that the State was gradually emerging from the disturbing shadows caused by floods and the COVID-19 pandemic, Sir. Balagopal said. The growth rate is even more remarkable considering Kerala’s achievement due to the restrictions imposed by the Center on borrowing and denying the State an acceptable share, he said. Kerala has been showing steady growth in GST revenue for the past few months. In October 2022, the State saw a growth of 29% over October 2021, according to data released by the Union Finance Ministry. Year-on-year growth has been consistently over 25% since May this year.

Read also |A way out of Kerala’s fiscal vulnerability

But there are several unresolved issues that worry the Left government—notably the Union government’s stance on loans taken by the Kerala Infrastructure Investment Fund Board (KIIFB), a Special Purpose vehicle to raise funds for infrastructure projects; and Kerala Social Security Pension Ltd (KSSPL). The Center has yet to accept that these debts to the State are just “contingent liabilities” and are not direct liabilities of the State.

The Comptroller and Auditor General of India (CAG) also flagged the problem in two recent audit reports on state finances, warning that unfettered “off-budget borrowings” could plunge Kerala into a debt trap later on.

In its audit report for the fiscal year ended March 2021, the CAG noted that the State’s fiscal liabilities had grown by 62.51% since 2016-17, taking the overall debt — including KIIFB and KSSPL liabilities — to ₹ 3,24,855.06 crore. crore In its stand, the Center has cut ₹ 14,312.80 crore from the State’s open market borrowing space. The amount will be deducted in four annual installments.

In a risk assessment of the state’s finances in June, the Reserve Bank of India (RBI) listed Kerala among the states with the highest debt burden. “These states will need to take significant corrective steps to stabilize their debt levels,” the RBI said.

Experts point out that it indicates whether Kerala can maintain its debt liabilities at a sustainable level. In a draft vision of the 14th Plan of the Five Year Plan (2022-27), the State Planning Commission observed that resource mobilization for the period would be a mammoth task.

In such a tight fiscal scenario, resource mobilization is likely to be the main theme of the 2023-24 State budget, which will be presented early next year. The Kerala government has launched measures to improve efficiency in tax collection and reduce fraud by revamping the state’s GST Department and offering prompt payment incentives. How these measures fare against rising expenditure – a situation Kerala has been suffering from for a long time – remains to be seen.

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