Kerala’s economy is facing a grave crisis. For several days, the treasury was running on an overdraft. There are restrictions on the clearance of government bills above Rs 1 lakh. The crisis, which is fast assuming the proportions of a catastrophe, is the inevitable result of the basic structural flaw in the fiscal policy pursued by successive state governments, and the Central government’s role in it is very limited, says Prof Prakash. Excerpts from an interview:
■ For more than two decades now, the Kerala government has been grappling with financial turmoil off and on. Has the state ever been in the pink of health?
I doubt it. The state finances were under stress even when C Achutha Menon was the chief minister in the 1970s. But crises in those times were not as severe as we face them now. Loss-making PSUs and slackness in revenue mobilization were the major factors that contributed to the financial stress in the old times too. The stress developed into a lingering crisis as salaries and pensions were revised every five years and governments failed to improve tax revenue but indulged in extravagance and continued to increase the size of bureaucracy.■ How did the periodic revision of salaries and pensions contribute to the collapse of state finance?
The state cannot afford to revise salaries and pensions once every five years. More than 60% of the state’s revenue is now used to meet the expenses of salary and pension. Several committees have recommended the government to increase the revision gap to 10 or at least seven years. But the system is in the hands of bureaucracy, and politicians can’t antagonize them.
■ In your opinion, what makes the present financial crisis a more acute and unprecedented one?
The government has admitted that it is on the brink of a financial catastrophe. If it was not for the Rs 45,000 crore revenue deficit grant it received from the Centre, the highest among states, Kerala would have hit penury long before. The state faced an almost similar crisis when A K Antony’s government came to power in 2001 after he inherited an empty treasury from his predecessor E K Nayanar. Antony’s attempts to cut the expenditure drastically invited the wrath of government employees and teachers. But, unlike in the past, there is no talk about any curtailment of expenditure this time. Instead, there is a deliberate attempt to shift the responsibility and put up a fight with the Centre citing half-truths and lies.
■ So, the unprecedented crisis is not an unexpected one?
It is not at all unexpected. The successive governments and every financial body associated with it were well aware of the looming crisis. Take for example the findings in the white paper brought out by former finance minister Thomas Isaac way back in 2016. He had rightly predicted how bad the state finances would be by 2021. He said that ‘the state was living on a financial lie’. It also predicted that the state’s revenue deficit would exceed 3.25% of the GSDP. All these predictions came true as the promises made by Isaac to drive the finances to new heights remained only on paper. Successive governments grossly overlooked the fundamental principles of finance. Instead, they indulged in reckless spending of public money.■ What do you mean by structural flaws in the fiscal policies? What is wrong with the system?
There is not much difference in the fiscal policy pursued by the LDF and UDF. Both indulge in financial extravagance to satisfy the interest of the powerful. They don’t have plans to improve resource mobilization and are always interested in the promotion of excessive increases in non-plan revenue expenditure. They promote the politics of extravagance. Politicians in power and those who are part of the government and trade unions consider government money as something that they can splurge on with zero accountability and guilt. They believe that it would keep on running on its own perpetually. Trader union leaders used to boast in the past that KSRTC will never face salary and pension problems as long as there is a government in the state. When there is reckless spending, the system is bound to fail.
■ What is the role of bureaucracy in it?
What contributes to this financial anarchy is an incompetent bureaucracy. If the bureaucracy is professionally competent and committed, it would be able to project a real picture of the state’s financial position and flag its gravity to political leadership. It would certainly deter the political leadership from reckless spending. Unfortunately, people in our finance department are not even competent to calculate the real impact of a pay revision on state finance. They prepare plans without understanding resource availability, leading to inflated annual plans and ultimate chaos, and get away scot-free.
■ What is the Centre’s role in this unprecedented financial crisis?
I don’t think there is any financial reason to say that the Centre contributed to the crisis. It’s a newly invented political reason to deflect the focus from an unaddressed, age-old malady. If the Centre contributed to the crisis, why did the three white papers brought out by the UDF and LDF fail to mention it, even remotely? They all held the incompetence of the state machinery, extravagance, and huge liability on account of pay revision as the major contributing factors to the crisis from time to time. The cascading effect of the Centre’s policies might have aggravated the crisis, but that’s not the root cause.
■ What is the way forward to tackle the crisis?
To resolve the crisis, first, there should be a political consensus. They should understand it not as the failure of one government or the other, or even the Centre. Political parties that come to power should adopt a responsible and realistic fiscal policy that would ensure a steady growth of revenue mobilization and a drastic cut in extravagance. The bureaucracy should understand the state’s inability to effect pay revision once in five years. Candidates with professional competency in finance should be recruited in the financial department. The governments should also dump the concept that the expansion of bureaucracy by setting up new institutions means the development of the state. Instead, we should be able to restructure or shut down PSUs and organizations that not only leave a hole in the state’s purse but also make no contribution at all.
