“Kerala's fiscal excesses are unforgivable”, ‘Business Line’, October 14, 2014

The fiscal crisis that has beset Kerala brings to mind Lenin’s maxim “Debauch the currency and destroy capitalism!” That of course was said at a time when Europe was governed by hereditary rulers. In the popular age in which we live Lenin is more likely to have cautioned “Wreck the treasury and debausch democracy.” The link between effective democracy and strong public finances may not be obvious but it is vital. In fact the opaqueness is heightened by the political class trying to explain away a culpability by making out that a fiscal crisis only reflects their efforts to improve the quality of life of the governed. When actually it reflects its patronage of vested interests, pursuit of competitive populism, attachment to pet projects or just plain incompetence at managing moneys placed in their trust. An element of all of these underlies the current fiscal crisis in Kerala, and it is not the first time that the state has found itself in one. About a decade and a half ago it was put about in the media that the national airline had refused to extend credit to the Kerala Government to fly its newly elected chief minister to Delhi. While it would be difficult to ascertain the veracity of this, it is not entirely unbelievable either. But it can be said with certainty that there is nothing generic to Kerala that it must live under a perpetual  fiscal cloud. It is not outrageous fortune but moral hazard that has led Kerala down this path.  

            Fiscal stress had existed even at the time of formation of Kerala state in the 1950s. In an interview with this author the centurion V.R. Krishna Iyer, who had served in the historic communist ministry elected to govern in 1957, recalled that the government then had had to make do with whatever little funds it could find. In retrospect, one is filled with admiration at how much the EMS Namboodiripad Ministry managed to achieve with respect to public provisioning in the health and education sectors on so slender a resource base. Clearly both Namboodiripad and Achutha Menon who had followed him were devoid of any sentimentality when it came to governance. They were conscious of being there to implement a certain democratic project and that they could ill afford to allow weak public finances to wreck it. The politicians who have succeeded them show no such awareness, which explains why the state finds itself in the present predicament. Governments claiming allegiance to ideologies of the left or the right have come and gone leaving nary a legacy except a mounting debt for future generations to repay. Kerala has been categorised as ‘debt stressed’ by the government of India.

            Unable to hold out any longer, around Onam time this year the Kerala Government signaled that its finances were under severe pressure. Austerity was announced, a hold on appointments in the public sector was ordered and a hasty revision of the rates on public services was effected. By then it was public knowledge that the Government had sought, and received, an overdraft from the RBI. Next the media reported that plan spending was to be curtailed. The last is unsurprising in such a situation but it should be of concern in Kerala where public capital formation is particularly low already. The Left Front, currently in opposition, saw this as an opportunity to embarrass the United Front government, currently in power, by demanding a White Paper on the state of the public finances. The Government has refused to issue one. This is an inappropriate response for two reasons. First, in a democracy citizens have a right to know the exact state of the finances they have entrusted to the government. Secondly, the first thing that the UDF had done when it came to power in 2012 was to issue a white paper on finances. In retrospect it becomes clear that this had been done with the express purpose of embarrassing their political rivals as they themselves have done nothing to improve the sates finances.

            Recurring fiscal crises in Kerala is a case of economics trumping politics. Historically, both the political fronts in the state indulge in cynical manouvres aiming to remain in power. By now little distinguishes the state’s political parties except their symbols at election time. An emptying treasury is the collateral damage. That the Malayali public know exactly what is going on is reflected by each of fronts being voted out at the end of their term. It can see that fiscal crisis does not periodically visit the neighbouring states. But the public have been unable to prevent progressive fiscal stress since, even in a democracy, politicians as a class hold the levers of power. 

I have mentioned that vested interests, competitive populism, pet projects and sheer incompetence as factors that have contributed to Kerala’s perennial fiscal crisis. Vested interests in Kerala contribute in two ways. There are commercial vested interests in agriculture, trade, real estate and education whose interest is quire directly represented by specific political parties and a corporatized media. This ensures them low taxes and concessions, with implications for the fisc. The other block of vested interests in the state are the public sector employees, both managers and workers, extending to the general administration. This section happens to be paid without any reference to either their productivity or the financial condition of the government. This may have mattered less if this section was under obligation to enhance the public revenues, but they are not. In Kerala the public sector exists as if to advance the interests of its employees rather than the public good. To the extent that the general administration is overstaffed, it lowers overall productivity by getting in the way of efficiency. On the other hand, the agencies responsible for public services are understaffed, and to the extent they provide producers services this lowers output. When output is negatively affected it lowers public revenues, as most taxes are levied ad valorem. As for pet projects, while there are many, the most noteworthy are the new public universities. Over the past decade both the political fronts have gone on a spree opening single-subject universities. Even the kalaris of medieval Kerala were more catholic in their offering of instruction. Apart from requiring that large tracts of land be acquired at market rates to house these projects they merely add to the fixed costs being incurred by the existing universities. The whole enterprise can only be seen as a pet project of politicians as it is not obvious that the constituency for this financial folly is particularly large.

The responsibility of Kerala’s political class in bringing about the present fiscal crisis is total. From the late seventies on there has been no serious initiative to grow the economy. I have referred to competitive populism. By now both the political fronts have set themselves up purely as purveyors of direct private benefits to the public no matter that this stands in the way of them providing producer services and public goods that alone can strengthen an economy. Fees and rates are raised reluctantly if at all. A model whereby the government indexes its payments to the inflation rate but is loathe to index rates accordingly is unsustainable. In a democracy it is the duty of those in public life to not only explain this to their constituencies but to do whatever it takes to ensure the robustness of the public finances. Kerala’s political class has failed this test yet again.