Given that few states had witnessed their natural growth rates in recent years, it was legitimate to extend the GST compensation mechanism for five years beyond July 2022, he said.
The concept of Goods and Services Tax (GST) was antithetical to federalism to begin with, Kerala finance minister KN Balagopal said, adding his voice to a growing chorus of state finance ministers and public-policy experts seeking a comprehensive overhaul of the structure, design and administration of the four-year-old consumption tax. “Cooperative federalism is at stake. GST hasn’t yielded the promised revenue productivity. Let us at least learn from experience and restructure the tax. There are also genuine concerns over the (lack of) democratic functioning of the GST Council. It is up to the Union government to display statesmanship and remedy the damage caused by GST to states’ finances and fiscal powers,” he told FE.
Citing the ‘rarest of rare’ economic problems being faced by his state over the past four-five years due to natural calamities including the severe floods of 2018 and pandemics, Balagopal said Kerala, with a creditable track record in “developing human capital”, was being virtually thwarted in its efforts to address ‘second-generation’ issues concerning healthcare, education and employment by assorted national policies and a tilt away from federalism.
“The Centre must desist from assuming a great role than envisaged in the Constitution… if the Centre walks the talk on its assurances and goes by the constitutional division of powers between it and the states, then Kerala will confidently grow out of the current crisis and make further progress on the path of sustainable, multifaceted development,” Balagopal said.
While some state finance ministers, including West Bengal’s Amit Mitra and Punjab’s Manpreet Singh Badal, have minced no words of late in their criticism of the GST Council’s way of functioning, Balagopal, a first-time minister who assumed office on May 20, was more restrained. “I think it is incumbent on the Union government to instill confidence among all members of the GST Council that a truly democratic spirit will govern the council’s functioning. Decision-making should be through consensus and the process should look convincing to all. There is a feeling that when it comes to fiscal matters, the Centre’s powers are rising. This must be checked. All stakeholders in the council must feel that justice prevails and is being delivered to them.”
He added that the Centre needed to really work hard to avoid conflicts in the council. The Kerala finance minister, however, refused to extend allegiance to the demand for a dispute resolution body under the GST Council. “The council is a body of senior political executives. It must be competent to resolve disputes and prevent them from arising.” He said the Centre would do well to adjure the notion that only it possessed good judgement in policy matters and appreciate that states knew better what was best suited for them. It ought to be recognised that states “are equal, equally mature and responsible partners in governance”.
Balagopal said his state’s best bet on boosting revenues in the medium term was ‘(higher GSDP) growth’, even as the immediate imperatives were enhanced public spending and adoption of ‘health-first’ policy. “As we control Covid-19 sooner than others, we will likely get a head start and economic activities including tourism will get a fillip. Income transfers to the people who lost livelihoods due to Covid-19 – Rs 8,900 crore in the current fiscal; interest subsidy on loans routed via cooperatives to farm sector & MSMEs (Rs 8,300 crore) and a sustained momentum in public funding of infrastructure would help spur consumption, the minister said.
In the revised budget for FY22 presented in the state assembly on June 4, Balagopal estimated tax revenue growth of just 6.5% on year, upon nominal GSDP growth assumed at 6.6%. Tax receipts had faltered and gone below historic levels after GST’s introduction despite the GST compensation facility (assured 14% annual growth) and S-GST receipts being half of state’s own tax revenue, he said.
The budget envisages fiscal deficit to sharply reduce from 4.25% of GSDP in FY21 to 3.5% in FY22 and, further to 3% in FY23. Asked how a sharp medium-term fiscal correction envisaged in the budget would work out, the minister said a likely pick-up in economic growth in the next financial year could improve buoyancy, while “we are also to focus on more efficient collection of taxes and may have to bring in some new taxes”.
Balagopal, who drafted a dissent note against GST as a member of a 2015 parliamentary select committee, said his state would object to any move to subsume sales taxes/VAT on petrol and diesel in GST, as it would constrict states’ autonomous fiscal space to a very low level (more than a third of Kerala’s own tax revenue comes from these levies). Given that few states had witnessed their natural growth rates in recent years, it was legitimate to extend the GST compensation mechanism for five years beyond July 2022, he said.
Kerala’ revenue deficit has been one of the highest among Indian states thanks to its liberal welfare spending, higher routine expenses and below-potential revenue growth. Salaries and pensions were nearly a third of the state’s total expenditure in FY20 and recent pay hikes could mean that these would remain at close to that level at least in the next few years – annualised increases in salaries and pensions between FY20-FY22 (BE) are seen at 12% and 10% respectively. Asked about this, the minister said while all efforts would be made to reduce the revenue deficit, elimination of it might not be feasible. In FY21, Kerala’s revenue deficit was 2.94% of GSDP (Revised Estimate), 59% higher than the original estimate (BE).
The minister strongly protested a sharp decline in the state’s share of the Centre’s divisible tax pool; from a level of 3% in 1980s, this share declined to 2.5% in 14th Finance Commission award period (2015-20) and further to just 1.92% in the 15th FC period (2021-26). “We have excelled in population control.. it’s an irony that instead of being rewarded for achieving a national policy objective, we are being punished for it,” he said. (Of course, the 15th FC has sought to balance this by also rewarding efforts to control population even as it went by the 2011 census to determine inter se share of divisible-pool taxes among states).
Between the 14th and 15th FC periods, Kerala’s share in divisible tax pool declined by a quarter and that was the sharpest fall among Indian states. Subdued Centre’s gross tax revenue, coupled with the effect of the FC award, meant that the state’s share in Central taxes declined by 53% from the Budget Estimate (BE) in FY21; for FY22 too, the revised budget recognised that the state would get only Rs 12,812 crore as central tax transfers, a good Rs 3,748 crore less than estimated in the budget presented by in February by Balagopal’s predecessor Thomas Isaac. Of course, a higher than expected revenue deficit grant from the Centre (Rs 19,891 crore in 2021-22) has come in aid, but this grant, seen at Rs 37,814 crore during 2021-26, would be tapering off.
Though Kerala’s budgetary capital expenditure is just 9% of its total expenditure, substantial additional asset-creating spending is being undertaken via Kerala Infrastructure Investment Fund Board (KIIFB), an off-budget body corporate. Asked if the recent controversy over KIIFB – CAG has objected to borrowings by KIIFB saying these breached the limits of government borrowings under Article 293 (1) of the Constitution, Balagopal said KIFB borrowings indeed had the RBI’s approval, adding that KIIFB, with robust repayment capacity, was confident of raising as much funds required to finance the big-ticket infrastructure projects already announced.
Balagopal said higher borrowings was inevitable for the state at this juncture to provide relief to the people and spur its economy. Some of the conditions attached to higher borrowing limit – reforms in power distribution which entails the state taking over the liabilities of the electricity board – were hard for the state to adhere to, as these were inconsistent with the ruling Left Democratic Fund’s political line, the minister said. The state’s borrowings of Rs 75,189 crore in FY21 turned out to be 52% higher than BE and are seen to rise by 13% on year in FY22.
