Monday, July 16, 2007

Reckless government spending pushes up public debt

The following appeared in Gulf Today, Sharjah, on July 16, 2007:
Kerala's public debt has risen above Rs550 billion. This represents a fivefold increase in 12 years. Developments of the last two decades show that a change of government makes no difference to the reckless spending.

The State government has been cash-strapped for many years. There have been occasions when cheques issued by government departments bounced.

There have also been occasions when the State treasury remained closed to avoid creditors. But the spending spree continues.

Deficit financing has been an accepted practice since 1950s when the Central and State governments embarked upon planned development. However, public borrowing by the State was on a modest scale until the 1990s.

On March 31, 1996 Kerala's public debt was only Rs101.14 billion. In the next 10 years, it grew more than four times to reach a staggering Rs418.78 billion. The heavy borrowing led to a steep rise in the interest burden too.

It shot up from Rs9.24 billion in 1995-96 to Rs26.13 billion in 2004-05. When the United Democratic Front was in power the Left Democratic Front criticised it severely for pushing up the public debt. But under LDF rule, heavy borrowing and spending continued.

Whichever front was in power invariably defended continued borrowing on the ground that the loans were used to finance developmental projects. This argument is no longer valid.

The previous UDF government acknowledged as much in the last annual Economic Review that it presented to the Assembly in 2005. The document, prepared by the State Planning Board, said that, although in the past a significant component of the debt burden went towards financing development plans, in recent times a significant portion was being used to bridge the gap in revenue receipts and non-plan revenue expenditure.

It also noted that there had been a substantial increase in internal debt over the years, mainly on account of mobilisation of high-cost market loans. Internal debt constituted about 52 per cent of the total debt at the end of 2004-05.

Central loans accounted for only 13 per cent. The Economic Review of 2006, presented to the Assembly last March, put the total debt as at the end of that year at a whopping Rs553.20 billion. Central loans amounted to Rs64.26 billion, a mere 11.62 per cent. Internal debt stood at Rs314.59 billion, or 56.87 per cent.

The Planning Board said, "The major portion of the debt liabilities was created by high cost borrowings made for meeting recurring revenue expenditure."

Ironically, the Keralite who has a higher average income than his neighbours also bears a higher debt burden than them.

Figures cited by the Planning Board show that per capita debt of Kerala, which was Rs6,285 in 2000, increased to Rs10,922 by 2004.

The corresponding figures for Tamil Nadu, Andhra Pradesh and Karnataka were Rs7,382, Rs7,290 and Rs6,587 respectively.

Tamil Nadu's debt was only 28 per cent of the gross state domestic product. Kerala's was 40 per cent of its GSDP, way above the all-State average of 32 per cent.

The Planning Board, which is now headed by Jawaharlal Nehru University economist Prabhat Patnaik, said the current rate of growth of debt was "a matter of serious concern." However, it made no proposal to reduce the deficit.

Patnaik, a Marxist, does not share current apprehensions about deficit financing, voiced by other economists.

In a paper, titled The Illusion of Finance, published two years ago, he said that in India an increase in government investment financed by a fiscal deficit would scarcely increase the net indebtedness of the state.

He cited two factors in support of his conclusion. One is that India has a large public sector specialising in the production of capital goods with substantial unutilised capacity owing to demands constraint. The other is the food security provided by the substantial unsold stocks of grain in the possession of the Food Corporation of India.

Both these factors, he contended, would work to prevent an increase in the net interest payment obligation as also an increase in wealth inequalities in society.

Howsoever valid Patnaik's argument may be in the wider national context, its validity in the conditions obtaining in Kerala is questionable.

Interest payments already eat up a quarter of the State's revenue. An extensive socio-economic survey conducted by the Kerala Sasthra Sahithya Parishad has thrown up evidence of growing inequality. This, of course, is the result of uneven flow of money from abroad, not of any governmental measure.

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