In its annual report, the Reserve Bank of India (RBI) has cited subsidies as one of the main reasons for the rising debt of the states. Kerala figures among the states that have unsustainable levels of debt.
In a conversation with Outlook, Kerala Chief Minister Pinarayi Vijayan talks at length about the freebies controversy, the RBI report, and rising debt burden on the state. Edited excerpts:
Prime Minister Narendra Modi has expressed serious concern over the 'freebie' schemes, saying it affects the growth of the Indian economy in the long run. What is Kerala's stand on this?
In my view, this issue needs a comprehensive look. Why welfare schemes for the poorer sections of society are called rather derisively as freebies? The rich also enjoy concessions from the government. Any utility provided to the needy will undoubtedly have a positive impact on the economy. A programme like MGNREGA, implemented when the Left parties were supporting the UPA-1 government from outside, is an example. Likewise, free education and health cannot be called freebies. If a poor family deservingly gets free power, it can spend more on consumption, which will have a catalysing impact on economic growth. One has to take a nuanced view instead of an across-the-board criticism.
Do you think there should be any guidelines or proper checks and balances for the government spending as far as welfare schemes are concerned?
There are enough checks and balances in the system. Spending and taxing require legislative sanction. Borrowings are limited by legislation and parliament. But unreasonable restrictions will constrain the fiscal space of states and local governments. This can have an adverse impact on economic growth, especially when the long impact of the Covid-19 pandemic is still palpable.
It is often said that in the name of welfare schemes, governments are exploiting the finances of the states and it is negatively impacting the economy. What is your take on this?
We cannot say that. It is well accepted that in a demand-constrained economy, welfare schemes can give additional incomes to the poorer sections which will result in higher consumption and consequently higher economic growth. No one can make a general statement that welfare schemes are a hindrance to economic growth. This is contrary to logic and reason. Intervention by the state has helped Kerala to achieve high human development indicators. This is there for everyone to see.
The expenditure of the state governments on subsidies grew by 12.9 per cent in 2020-21 and 11.2 per cent in 2021-22. Recently, RBI in its recent report pointed out that the fiscal health of Kerala warrants a careful assessment because of its larger focus on social welfare. How do you see that report?
Kerala focuses on genuine welfare expenditure and has also implemented programmes for socio-economic change in the last six decades under the Left governments. Some setbacks have been there when the Left went out of power intermittently. As for the subsidies in 2020-21, our food subsidies have been higher, and this is because of the relief provided in the extraordinary situation in the wake of the Covid-19 pandemic. This need not be seen as fiscal profligacy. The unforeseen circumstances warranted this.
Recently, the Kerala government wrote a letter to Union Finance Minister Nirmala Sitharaman expressing concern that the Centre has cut the state's resources by 23,000 crore…
Kerala will face a shortfall of Rs 3,628 crore due to reduction in fiscal-deficit GSDP ratio from 4 to 3.5 per cent in 2022-23. In addition, the decision of the Union Finance ministry to reduce the limit for Open Market Borrowings by including borrowings by statutory organisations will result in a shortfall of Rs 3,578 crore, Rs 12000 crore from cessation of GST Compensation, and Rs 7000 crore from tapering off of grants to cover revenue deficits. These add up to Rs 26,228 crore, more than the Rs 23,000 crore anticipated by us earlier.
Besides, the transfer from the divisible pool of taxes collected by the Union has been registering a steady decline over the last two decades. This has resulted in a situation where a state like Kerala is being penalised for its achievements which were attained through strenuous efforts and with a substantial fiscal cost. This goes against the grain of federal principles.
Kerala is going through a financial crisis. The reasons cited are the dependence on borrowings and the failure to find new sources of revenue. How do you look at it?
We are not the state most dependent on borrowings. We are taking efforts for the mobilisation of own revenue from tax and non-tax sources. We are doing this in a systematic and phased manner. We are witnessing results. Besides, we are taking steps for long-run economic growth by focusing on social and physical infrastructure.
It is unfounded to say that we are the most indebted State. Official publications by RBI disprove it. We have faced pandemic-induced problems in public finances. The Centre and most states also have it. We have the political will to go ahead with infrastructural projects and welfare measures for marginalised sections of society. Let me also state that certain actions of the Centre, like discontinuance of GST compensation, curbs on borrowing limits, etc. are severely restricting the fiscal space of states including Kerala. Imposing such fiscal constraints on states, that too during this period of general economic slowdown is iniquitous; particularly when the Centre’s fiscal deficit is double that of the States.
