Monday, October 1, 2007

No firm measures to tackle continuing financial crisis

SOON after the Left Democratic Front government took office last year, Finance Minister TM Thomas Isaac said the State government's finances were in a mess. He promised a status paper on the subject and spoke vaguely about mobilisation of additional resources.

Early this year, while interacting with traders before preparing the budget, he again said the state was facing a financial crisis. The only way to tide over it was to mop up additional revenue, he added.

Last week, as the first half of the current financial year was drawing to a close, he sang the same tune again. There was once again talk of mobilising resources with no indication as to what he planned to do and when.

An economist by training, Dr Thomas Isaac was a fellow of the Centre for Development Studies, Thiruvananthapuram, before becoming a full-time politician. Having served as a member of the State Planning Board during the last LDF regime, he is quite familiar with the working of the government machinery.

Why are his expertise as an economist and experience as a planner of little avail in tackling the financial crisis, of which he keeps talking all the time? He himself provided the answer to this question in a television encounter with another economist, Dr BA Prakash, a few days ago.

When Prakash, who is professor of Economics in the University of Kerala, spoke of the need for harsh measures to overcome the fiscal crisis, Thomas Isaac made it clear that he would not take any such measures that would hurt the common man.

Thomas Isaac's reluctance to raise taxes was evident when he presented his first full budget in March. He estimated a revenue deficit of Rs52.51 billion in 2007-08, but provided for additional resource mobilisation of less than Rs2.5 billion.

The provision was clearly inadequate. Some months earlier Thomas Isaac had indicated that additional revenue of Rs9 billion was needed for just one item: revision of state government employees' wages.

Three-fourths of the state's revenue goes into payment of salaries and pension to its employees. In just 10 years, the annual salary bill shot up from Rs22.16 billion to Rs80.55 billion and the pension bill from Rs7.53 billion to Rs40.54 billion.
Pension expenditure has been galloping since the government holds down the age of superannuation at 55 years even though life expectancy in the Srare has risen above 75 years.

Another major item of expenditure is interest on loans. It now accounts for 29 per cent of the State's expenditure. Public debt, which has been rising from year to year, stands at a record Rs535 billion. Together, salary bill and interest liability now exceed revenue. Yet Thomas Isaac is reluctant to resort to additional taxation. He prefers public borrowing.

Taxation in Kerala is comparatively low. The Planning Board, in its latest annual review, points out that in the last 15 years the state's tax revenue has remained stationary at slightly above nine per cent of the gross state domestic product. During this period, the other southern States raised the tax-GSDP ratio "quite significantly," it adds.

The LDF and the United Democratic Front, which alternate in power, are equally reluctant to raise the tax burden. While they justify their stance in the name of the poor, the real beneficiary is the business community, which has profited by the growth of consumerism.

The state government's main source of revenue is sales tax. Its record of tax collection is poor. The introduction of value added tax by the Centre has considerably limited the state's manoeuvrability with regard to sales tax.

Thomas Isaac recently initiated two measures to augment sales tax revenue. One is centred at the Walayar check post and the other at Kochi . Both aim at plugging revenue loss, primarily by checking corruption. Preliminary reports indicate encouraging results.

However, it is too early to make a realistic appraisal. The government is planning to raise Rs200 billion from non-resident Keralites, mainly those in the Gulf States, to build infrastructure. The Cochin International Airport Limited, which is cited as the model, succeeded mainly because it received strong support from Central undertakings.

Lack of resources is just one of the government's problems. Thomas Isaac acknowledged in the channel debate that the inefficiency of the official machinery was resulting in Central grants remaining unspent. However, he outlined no plan to address the problem. -- Gulf Today, Sharjah, October 1, 2007.

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