Fiscal crisis and the Kerala model

By S. Swaminathan

The change of guard in Kerala, following the rout of the Left Democratic Front (LDF) in the recent elections to the State Assembly, has predictably generated a debate on how the LDF Government had handled the State finances during its five years in office. The white paper issued by the new United Democratic Front (UDF) Government on June 18 seeks to lay bare the near- bankruptcy of the State and the inevitability of ``hard decisions'', a phrase often used by governments in the past, at the Centre and in the States, with an all-too-familiar lack of credence.

The concept of a White Paper itself is nothing unusual. In fact, any new government owes it to the people to share with them its understanding and perceptions of the developmental lags in the State owing to a ``resources crunch'', wrong priorities in spending or laxity in mobilisation of revenue or plain mismanagement of the economy. The Antony Government in Kerala need not make an elaborate plea that the White Paper is not a political document nor a charge-sheet and that it is a ``sad tale of the woes of the State.'' But it would have done a lot of credit to the new Government if it had obtained an assessment of public finances from non-government consultants rather than from its own bureaucratic apparatus.

The central finding of the White Paper is that the State has virtually exhausted its credit-worthiness and that in the absence of bold measures for mitigating its public debt and the interest burden, which has ensued from it, bankruptcy is imminent. The Chief Minister has talked of ``feasible alternatives'' with regard to fiscal policy. What these are except the conventional notion of reduction in wasteful expenditure, recovery of user costs in power, public health, education and services in general, are yet to be unravelled.

One suggestion that seems to be surfacing in UDF circles is that Kerala ought to reject the earlier LDF policy of treating the ``below the poverty line'' (BPL) and ``above the poverty line'' (APL) sections on a par for purposes of subsidies whether in food distribution, education or in public health. For too long, perhaps, Kerala has indulged in the ``soft State syndrome'', following a model of development where distributive justice has made rapid strides at the cost of productive efficiency and of new investments.

The phenomenal progress made by the State in literacy, women's empowerment, life expectancy and in the health status of people in the disadvantaged and vulnerable sections has, of course, evoked well-merited appreciation from development experts including Professor Amartya Sen. But the point is that the State has missed out on the overall strategy of generating economically sustainable livelihood for the poor. Apart from the truly Herculean task of creating jobs at a pace commensurate with the additions to the labour-force, Kerala has neglected practically all the avenues for new investments excepting tourism. Nor has the private sector in Kerala or elsewhere in the country chosen to see the state as an investment destination, with its enduring negative image in view of the militancy of the working class. A narrowly-defined commercial-crop-dominated economy, Kerala seems to be mired in a state of retardation which is in paradoxical contrast to the sizable inflows of funds from NRIs.

Crisis of globalisation?

There are no two opinions on the gravity of the fiscal crisis in Kerala - the penalty for the failure of the State to institutionalise a system of cross-subsidisation by taxing the rich and the well-to-do middle class and by funding the social security of the poor. A larger dimension of the development crisis in Kerala is that the pursuit of economic and social empowerment of the poor - equity - has needlessly sidelined the imperative of economic growth and not all because of paucity of investible resources.

To say that the crisis has been caused by the Centre's policies of liberalisation alias globalisation would be to ignore the fact that the steep decline in the prices of rubber and copra in the recent past has had more to do with a supply-demand mismatch than with import liberalisation. In the case of copra, in particular, consumer preferences seem to have tilted the balance against coconut oil, and therefore, the task of safeguarding the interests of the farmers would call for distinct new marketing strategies rather than a no-holds-barred public procurement programme. The new Government would need to strive to improve the image of the State in terms of the perceptions of investors even as it pledges itself to promote the much-hyped IT sector and to harness the untapped potential in tourism.

Fiscal correction - the menu

Contrary to the ``reflexes'' of the Opposition in relation to the White Paper on the State's finances, the Governor, Mr. S.S. Kang's address to the Kerala Assembly indicates that the Antony Government is in no unseemly haste to launch drastic measures of fiscal reform and thus provoke the ire of the people. Augmentation of resources through better tax collection and the enforcement of austerity measures (assuming that performance in this area would match announcements) are, by no means, ``out of the box'' ideas. Is the UDF Government serious about restructuring sick public sector units with private investment?

Even granting that the ``free lunch'' mindset is deeply entrenched among large sections of the population of the State, will the Antony Government move towards the ``dreadful'' area of subsidy reduction in power, public transport, education and medicare? There are already clear hints that no drastic fiscal correction is being contemplated but that a broad political consensus in favour of fiscal correction will have to be nurtured. If Kerala's finances are not to be further imperilled even as efforts are undertaken to revive the economy, there is no doubt that the State must leverage the non-resident Keralites (NRK) factor for securing capital for development of IT, bio- technology, tourism and the medicare sector. Given the long era when Kerala has merely stood by when NRI funds found their way into ``conspicuous consumption'', there is no way for the earnestness of the new resolve to be gauged.

Although not a unique delinquent in fiscal mismanagement when compared with a State like Bihar, Kerala does afford valuable lessons on how the process of development can be hijacked by misguided policies which, in the main, have placed the ``cart'' of over-extended social welfare before the ``horse'' of economic growth led by investment and productivity.

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