KN Balagopal has his work cut out for him. As Finance Minister of Kerala, he is responsible for leading the state away from a debt crisis and funding the state’s development dreams. Excerpts from an exclusive interview:
Q/ GST compensation to states will end this month. How will this add to the woes of the state which is already reeling from severe financial constraints?
A/ If the Union government stops compensating GST, all states including Kerala will face major financial difficulties. With the implementation of the GST, the entire right to charge the tax [on different commodities] was transferred to the GST Board, where the Union Government has the upper hand. We had apprehensions about this from the start-up phase itself. Many states feared their revenues would be hit [because of GST implementation]. Before the implementation of the GST, we used to see about 14% growth in tax collection year over year. Kerala’s average was more than that. The Center had given assurances that this 14 percent growth would be maintained. The government had also given the assurance that if this growth rate was not achieved, due to systemic problems, it would provide compensation to ensure a guaranteed return of 14%. And, they decided to give this compensation for five years. But then we faced two bad years because of Covid-19. In the current situation, there is a huge gap. We don’t get as much revenue as before.
Thus, Kerala demands that the Union government maintain the GST compensation for another five years. Other states, including BJP ruling states, have demanded it. Kerala alone will face a revenue shortfall of around Rs 10,000 crore [compared to the old tax system] this year if the GST compensation is stopped.
Prior to the Lok Sabha elections, the GST Board decreased the tax rate for certain products as per the wish of the Union Government. And this is one of the reasons for the shortfall. Such unilateral and unscientific decisions were taken before the elections.
Technical difficulties in implementing the GST tax regime also persist. The [tax collection] the system is not intact even now. It has not improved and is still in the preliminary stage. So, in view of the Covid-19 situation and the economic crisis all over the world, the Union government must extend the GST compensation for another five years. Otherwise, the whole economy will suffer.
We cannot reduce the basic income expenses – salaries and money for day-to-day activities – and if the Union government stops GST compensation, it will affect our development activities. Kerala is a state that carries out many social service activities under the plan. All of these activities will be impacted.
Q/ State revenues increased by 20.77% in 2021-2. But expenses have also increased. Some believe the government could have postponed the wage review and used the money for an economic rebound.
A/ In Kerala, we carry out salary reviews every five years. What government employees deserve should be given to them; it is the attitude of the State. But our income should also increase and better services should be provided. Our population-to-employee ratio and population-to-school/college ratio are high. It is part of our policy. We want to give the best to the student community and develop human capital. And, for that, there are expenses.
Q/ What measures have been taken to reduce expenses?
A/ There is a government effort to reduce unwanted expenses, such as the overuse of [government] vehicles or the purchase of new vehicles. We have already issued instructions regarding austerity measures.
Q/ The Union government wants Kerala to include off-budget borrowing in the budget deficit calculations. How would this affect the development of the state?
A/ It goes against development economics. Spending more and attracting more investment is a way out of the crisis. [Off-budget borrowings] are used for construction and infrastructure development. This will create employment opportunities.
The Center does not give enough money to state governments. He doesn’t even allow us to borrow. The borrowing limit has been lowered from 5% [of the gross state domestic product] at 3.5 percent. And they (the Center) plan to reduce it further to 3%.
First, they took away our right to collect taxes. Now they are trying to take away many other rights.
Q/ Does the Center curb the tax freedom of States?
A/ What the Union government is doing is dangerous. Their economic policies affect federalism. They have no respect for the dignity and autonomy of states. They do not take into account the dignity of the peoples of these States.
Q / Kerala is to take in more than Rs 30,000 crore in foreign funds to construct the K-Rail, which the state government says will bring huge development and employment opportunities to the state. But Kerala has an aging population. Will it be an obstacle to achieving the level of economic progress expected by the time K-Rail is completed?
A/K-Rail is a project that would help long-standing developments in the state. Our current rail system is outdated. Moreover, our roads are congested. And, as our population density is high, we cannot think of building more highways. Kerala is a densely populated state. It is only in a populated place that this kind of project succeeds because there will be a lot of passengers. Also, you highlighted demographics. Our new generation is migrating to places like Europe, the United States, Australia and Canada. So if we provide better infrastructure here in Kerala then our best minds will be able to work and settle here. And, for that, high-speed travel infrastructure is very important. If we have a good infrastructure here, more opportunities will be created here. We can develop the knowledge economy right here.
Q/ The government has announced decent compensation for people displaced by K-Rail. But, for many people, it is not only the monetary factor, but the attachment to their home and their locality. The government had previously tried to install survey stones with the help of the police. And that sparked a lot of protests. What is the government’s position now?
A/ We see K-Rail as a project that should only be implemented with the support of the people. The government belongs to the people. We believe that we will get the cooperation of the people. If people don’t want this, then who are we doing this for? Moving this project forward without people’s support is not part of our concept.
The reported compensation package for K-Rail is attractive. Many people will have an emotional attachment and nostalgia tied to their home, and I agree. But they will receive good compensation and can move to a place close to their old home.