Kerala seeks fresh investments amid global slowdown

Even as the recession exported by the United States is slowing down economies around the world and capital is becoming increasingly scarce, Kerala is seeking fresh private investment in various sectors.

Last week the state government placed before an invited gathering of Non-Resident Keralites 60 tourism schemes requiring investment ranging from Rs. 10 million to Rs. 4 billion. Tourism Minister Kodiyeri Balakrishnan said later that investment of the order of Rs 10 billion was expected.

He added that the government would encourage NRKs to form companies and use their resources to develop tourist facilities in their own places.

Also last week the Kerala Chamber of Commerce and Industry released a study report which indicates that, apart from tourism, there are a dozen sectors which offer scope for profitable investment. These include processing of spices, products based on coconut, engineering, education, Ayurveda and, of course, information technology.
The Chamber commissioned the study in advance of the global investor meet, which it plans to hold in April, to promote capital flow to the state.

Meanwhile, the Communist Party of India (Marxist), which heads the government, has put behind it the controversy over the role of private capital. Chief Minister VS Achuthanandan, who was considered an opponent of foreign capital, said the other day that it can be accepted if it is in the state’s interests.

Achuthanandan’s clarification came after party state secretary Pinarayi Vijayan’s chief lieutenants, Finance Minister TM Thomas Isaac and Industry Minister Elamaram Kareem, emphatically argued that the state needs to attract private investment.
Thomas Isaac has indicated that in the next state budget he will go all out to encourage the inflow of private capital. According to him, that is the only way to overcome the effects of the global economic slowdown.

He has set two primary budgetary goals for the next financial year. One is strengthening of social security measures in the context of the economic crisis. The other is raising of capital investment from the current level of Rs 300 billion to Rs 500 billion. This, he says, can only be done by attracting private capital on a large scale.

Thomas Isaac has evolved a strategy to overcome the restrictions on borrowing by the state government. He proposes to encourage local bodies and public undertakings to go in for maximum loans. The state government will provide guarantee for their loans.

The report of the Centre for Development Studies, Thiruvananthapuram, which was asked by the government to study the likely impact of the global meltdown on the state’s economy, also lays emphasis on the need to attract private capital.
According to the CDS, credit availability is likely to decline in spite of the measures taken by the Central government. It points out that the global crisis has had a perceptible impact on the state’s traditional exports already. There may also be a drop in tourist arrivals.

While the state government may not be able to adopt pro-active strategies with regard to provision of credit, the CDS says it may consider using the cooperative banking network to help small and medium enterprises and exporters of products like cashew.

The government cannot do much to boost the demand for the state’s traditional exports. However, it can take steps to raise the ability of commercial crop growers and workers to withstand the effect of a decline in the prices of export products.
The CDS report says, “The crisis should not lead to panic reactions like suicides by the affected people. However knee-jerk reactions like writing off credits at the time of such crises are not sustainable.”

Although there may not be any immediate fall in foreign remittances, the mainstay of the state’s economy, the report cautions that the West Asian countries may reduce investment activity in the light of the fall in oil prices.

It estimates that the global crisis may reduce the growth rate of the state’s economy by two to three percent and lead to an increase the government’s revenue deficit.

The 98-page report goes beyond the immediate problem of mitigating the effects of the economic crisis and discusses such matters as raising the state’s capacity to face crises, strengthening social security, stimulating the economy and improving governance.

Pointing out that institutional rigidities are preventing optimal use of Kerala’s resources, including human capital, the report urges the government to use the window of opportunity provided by the global crisis to usher in reforms. -- Gulf Today, Sharjah, December 29, 2008.

A feeble attempt to chart a new financial course

A FEW DAYS before Finance Minister TM Thomas Isaac presented the state budget, a television interviewer asked him whether it would be a populist budget or one with a sense of realism. He gave a clever answer: "It will be a populist budget with a sense of realism."

Three days after he presented the budget to the state assembly its character is still unclear.
His supporters claim that he has come up with a Left alternative to the Centre's liberalisation programme. Critics say he has adopted the neoliberal agenda.

There are, of course, many populist measures in the agenda. Since the Congress-led Central government's budget, presented a few days earlier, contained indications of early lok sabha elections (general elections), the Communist Party of India (Marxist)-led state government, too, had to take electoral considerations into account.

Besides offering a small increase in the paltry pensions now paid to various groups, Thomas Isaac announced a few new welfare measures too. The most important of them is an insurance scheme, which is an enlarged version of the one drawn up by the last government.

In this budget, Thomas Isaac has moved away from loud advocacy of deficit financing.
Until recently he was highly critical of the approach of the Centre and the previous state government, which were moving towards deficit-free budgets. He is now willing to limit deficit financing to the capital account only. He hopes to wipe out deficit in the revenue account by 2010.

The change in his attitude is the result of a hopeful turn in the state's finances, brought about primarily by improved tax collections. Fifty years ago, both Kerala's government and people were poor. The Gulf boom brought a measure of prosperity to sections of the people, but the government continued to be poor. Now, it appears, the government too can look forward to better days.

Most of the taxation proposals have provided relief to various sections. For instance, the tax on used car sale has been lowered and that on mobile recharge coupons has been dropped.

There are just a few proposals that will add to the costs. The most important of them is a one per cent cess of the value added tax, which the Finance Minister expects to yield Rs one billion.
To begin with, he was critical of Vat, but improved tax revenues seem to have persuaded him to change his attitude towards it.

While spokesmen of trade and industry have complemented Thomas Isaac on the budget exercise, they are opposed to the cess and want it to be dropped.

Even as he reduced the tax on all hospital equipment to four per cent, he imposed a 10% luxury tax on hospital rooms fetching rents of Rs1,000 or more a day. He expects the measure to yield only Rs10 million. Considering the proliferation of expensive hospital rooms and their high occupancy rate, this is a low target.

Some tax proposals are clearly aimed at achieving specific goals. The imposition of 12.5% tax on plastic carry-bags simultaneously with the total exemption of paper bags from tax is in keeping with the objective of promoting use of biodegradable products.

A close scrutiny of the proposals reveals the emergence of a new strategy to raise resources.
It essentially involves identification of areas of commercial profit and negotiation of specific deals with them.

In several sectors such as hotels with bars and jewelleries, provision has been made for compounding of tax at specific rates to ensure a certain minimum increase in revenue.
The rates were fixed in private negotiations held before the budget proposals were framed.
In the case of jewelleries, the compounding rate has been fixed at 150%.

In a post-budget discussion, Thomas Isaac revealed that in discussions with jewellers' representatives he had proposed a rate of 200% but eventually settled for 150%. The new strategy has ensured a 50% increase in the tax to be collected from the jewellers.
But it raises ethical questions in as much as private negotiations between the government and the trade offer scope for misuse of authority.

In this particular instance, the state may be losing more than it gains because the price the government has to pay for a settlement is to shut its eyes towards the large-scale tax evasion prevailing in the trade.

The Finance Minister has certainly made an attempt to chart a new financial course. But it is too feeble. With the state's finances showing signs of buoyancy, the time has come for the government to think of a comprehensive social security scheme instead of continuing with the piecemeal approach of the past. -- Gulf Today, Sharjah, March 10, 2008.

Portrait of the minister as an expert

The performance of Dr. T. M. Thomas Isaac, who came to the office of Finance Minister of Kerala with the reputation of an economic expert, reminds me of the story of Arthur Conan Doyle, the creator of Sherlock Holmes. It is said that an English county, impressed with the detective hero’s investigative skills, offered a top police job to Conan Doyle, but he could not solve any real-life mystery.

Thomas Isaac is the economist who has risen highest in the State CPI (M) hierarchy. He was the prime mover behind decentralized planning, which was presented as the most revolutionary programme since the first Communist government under EMS Namboodiripad introduced land reforms. It took three or four decades for the people to realize that land reform measure could yield only limited good. The limited nature of decentralized planning became evident in less than decade.

Even when programmes fail, their prime movers can succeed. When the Left Democratic Front returned to power, Thomas Isaac became the natural choice for the post of Finance Minister on the strength of his experience as a legislator and a member of the Planning Board and by virtue of his being on the right side in the party. But all his calculations did not work out. The Chief Minister appointed Prabhat Patnaik, who does not share his and the party’s views on Marxist practice in the age of globalization, as vice-chairman of the Planning Board.

The Finance Minister was among the new faces in the Cabinet who declared war on corruption. As he swept everything clean with the enthusiasm of a bride, the World Bank-aided Kerala State Transport Project for modernization of roads attracted his attention. KSTP was launched in June 2002 when the United Democratic Front was in power. If everything had gone as planned, the projected would have been completed by the end of this month. When the LDF took office it was clear that the time schedule could not be kept. The Malaysian company, which was in charge of the work, demanded the contract amount be raised as work had fallen behind schedule due to lapses on the government’s part, including failure to acquire the required land in time. The government argued that the company had not completed the work even in areas where land was made available. At that time the Public Works Minister’s attention was elsewhere. The Finance Minister took the reins from him.

Thomas Isaac is not among those who consider World Bank money tainted. Yet he did not show much goodwill for KSTP. His public statements of the period suggest that he viewed it as a UDF project. He put in the dock the PWD Minister of the United Democratic Front government and the consultants, besides the contractors. He announced a Vigilance inquiry against the former minister and blacklisting of the Malaysian company. Work came to a standstill. The people were in distress. The Malaysian company’s representative committed suicide.

It was the previous LDF government that had initiated the talks that led to KSTP. Yet it became a UDF project in the minister’s eyes because it was the UDF government that awarded the contract. Projects are dear to politicians not because they are good for the people but because they give them the opportunity to award contracts.

The minister’s efforts to award the contract to someone else did not succeed. Realizing that anyone else would have to be paid more than what the Malaysian company demanded, the government finally decided to pay it what it demanded and ask it to complete the work. Loss and ridicule was what the economist’s expertise gave the State. But he still maintains it is all the fault of the previous government and the officials.

KSTP, with an outlay of Rs. 16.13 billion, was conceived with a view to improving about 1,600 kilometres of road and 77 kilometres of waterways. The World Bank offered Rs. 12.24 billion. The State’s share was fixed at Rs. 3.89 billion. The reasons cited by the Planning Board for the difficulties encountered in its implementation are different from those mentioned by the minister. The Board says it fell behind schedule for several reasons, including faulty design. The State, which was to spend a total of Rs. 3.89 billion, had already spent Rs. 8.21 billion, till the end of last year. Prabhat Patnaik, who is opposed to foreign loans, cites KSTP as a classic example of the pitfalls of foreign-funded projects.

Never did the State government spend the entire fund allocated for the project in the budget. In the first year actual expenditure was Rs.670 million against an allocation of Rs.1 billion, in the second year Rs.1.46 billion against Rs.1.55 billion, in the third year Rs.1.97 billion against Rs.2.35 billion and in the fourth year Rs.3.12 billion against Rs.5.75 billion.. In the fifth year, too, the budget provided for Rs.5.75 billion but the Finance Minister gave only Rs.990 million.

The Malaysian company has agreed to resume work on the project within a month and complete it within two years. In the light of the State’s past experience, further cost overrun cannot be ruled out.

There is material for consolation for Thomas Isaac in the Conan Doyle story. Although he failed as a detective, Conan Doyle was able to make a big contribution to the administration of justice. His strenuous efforts resulted in the acquittal of two persons who were earlier convicted unjustly. His exertions also played a part in Britain’s decision to set up a criminal court of appeal. Let Thomas Isaac also redeem himself with good work in some other area.
Based on column “Nerkkaazhcha” published in Kerala Kaumudi dated December 20, 2007