‘Kerala’s political class not engaging with people on fiscal stress imperatives’

A recent commentary on Kerala’s fiscal stress has observed that the political class is finding it increasingly difficult to engage with the people on public resource mobilisation.

“It is as if they cannot communicate this imperative to a society long accustomed to a light fiscal burden,” Jose Sebastian, Faculty at the Gulati Institute for Finance and Taxation, Thiruvananthapuram, said.

“Instead of presenting the State as an empowered and legitimate entity to raise resources from the people, they are tempted to go in for softer options,” he said in a paper titled ‘Kerala’s persistent fiscal stress.’

Competitive populism

Putting his study in perspective, Sebastian said that the efforts to provide insight into the fiscal stress have sought to lend legitimacy to the bogey of ‘neglect’ raised by coalition governments opposed to the Centre.

“In a democratic polity, fiscal management is essentially a political process. The time horizon before an elected government is short,” he said. “This makes governments to resort to competitive populism, characterised by a reluctance to mobilise public resources from taxes and user charges and incurring expenditures for short-term political gains.”

Under such circumstances, public debt becomes a residual source of finance for governments. This gets exacerbated with coalition governments supported by political parties of different ideological persuasions and constituencies.

A coalition government has to negotiate with the populist tendencies of each of its constituents and this renders coalition governments inherently weak. “The fiscal illusion, together with the popular perception of a highly taxed state, and the findings of scholarly studies on tax performance, have provided a perfect setting for the political class to engage in competitive populism,” Sebastian said.

The need for more public resources as evidenced by the ever-growing revenue and fiscal deficits and debt burden, in relation to the increase in the ability of the people to contribute towards public purposes, is often ignored in public discourses.

‘Kerala model’

The hype of Kerala ‘performing well’ with the tax effort front seems to have generated a sense of complacency, and justified the dependence on borrowed funds to meet expenditure needs.

Successive Finance Commissions and the Planning Commission also seem to have been influenced by these studies. There has been no serious questioning of Kerala’s fiscal performance by these agencies.

“Presumably, the overwhelming appeal of the ‘Kerala model’ might have induced many to bypass this vital shortcoming,” suspected Sebastian.

Two explanations

Since the state is perceived to be performing well at the tax effort front, the reasons for the fiscal stress had to be sought elsewhere.

One explanation from the expenditure side held that the root cause of the fiscal crisis was the high non-plan revenue expenditure in the field of social and community services.

Another explanation is the constraint imposed by the Constitution in tapping the potential of the state’s service sector. Kerala is service sector-oriented with growth at a fast clip. Since states were not constitutionally empowered to tax services in general (except certain specific services), it was unable to mobilise the required public resources.

The solution, therefore, was to empower the states to tax services. However, the introduction of the GST — which enabled the state to bring services under the tax net — has not led higher tax revenue either.

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