The long-winded budget speech of Finance Minister K.N. Balagopal came as a surprise given his earlier performances.  While it might be music to many people listening to a long list of projects and schemes, what I find disappointing is the overall decline in financial discipline and efficiency that gets further reinforced if one considers what he did not say. For example, he was jubilant about the increase in the state’s own revenue (tax and non-tax) that works out to 9.8 percent since last year and presented it as an achievement. That is not a measure of tax collection efficiency because one should also consider the tax base i.e. the state’s income referred to as GSDP that grew by 11.3 percent. This resulted in a reduction of tax to state income ratio to 7.8 compared to the last year’s 7.9. That is to say, he collected Rs 7.8 for every hundred rupee of state income this year, while it was marginally higher last year. But this decline would appear as a bigger one if you compare the tax to state income ratio of 8.5 in 2022-23. In fact, a longer period analysis would show that it was a steep decline from around12 percent in the late 1970s to 9 to 9.5 till 2017-18 and between 8 to 9 since then.  What this shows is a progressive decline in tax collection efficiency that is witnessing another low-level equilibrium of between 7 to 8 percent. If the finance minister had been able to maintain his own previous record of 8.5 rupee of revenue collection for every 100 rupee of income he would have got an additional revenue of close to Rs.9000 crores.

But the real tax to state income ratio is quite lower than what is given in the budget papers because it does not include remittance income in the state income in accordance with the all-India practice.  Since this is a significant size in Kerala (equivalent to 17 percent of state domestic income in 2023-24) constituting people’s disposable income, the tax to state income ratio works out to a mere 6.7.  Given Kerala’s first rank in per capita consumption expenditure and an attractive market for all kinds of fast-moving consumer goods, this low ratio is nothing less than a pitiful performance in tax collection efficiency.

Another significant point I want to make is that the relatively low revenue deficit is an artifact because some expenditures have been postponed out of this year’s account. This include Rs.16000 crores payment due to contractors and establishments who have completed the works undertaken for the government, the three months due of social pension amounting to Rs.3400 crores and the Pay revision arrears of Rs.15000 crores.  If these main arrears are added to this year’s expenditure, the revenue deficit would be 4.98 percent of the state income as opposed to 2.29 percent as stated in the budget papers. There are other payment obligations such as payment to the Anganwadis, school midday meals, etc. that are not counted here for want of precise details. If they are included the revenue deficit will be well over 5 percent of the state income. Earlier these payment obligations were met by additional borrowing and hence the higher revenue deficits. Since a cap on borrowing has come to effect, the only way to show a lower revenue deficit is by not meeting payment obligations. But then this is bound to show up next year unless tax collection efficiency is increased.

Despite the ceiling imposed in overall debt to state income ratio, the government’s increasing reliance on debt just to finance its day-today expenditures has landed it in a situation where 22.4 percent of the total revenue must be earmarked for paying interest. Add to this another 20.8 percent for payment of service pensions. In sum, 43.2 rupees from every 100 rupee of total revenue must be earmarked for payment of interests and pensions.  That leaves close to only 57 rupees for all other items of expenditure. This leads to a fight for debt and more debt; but no commensurate enthusiasm seems to exist to increase revenue collection efficiency.

There is no way but to increase revenue collection efficiency to come out of this vicious circle of debt for government consumption.

(The author is a development economist.)