In the rain of promises in the manifestos there is no evidence of the wherewithal

The two political fronts of Kerala, the Left Democratic Front (LDF) and the United Democratic Front (UDF), have now presented their manifestos to the electorate. They are joined by distributivism, competing with one another in offering welfare payments. Almost no section has been left out — the old, the youth, the housewife. First off the mark with its manifesto was the ruling LDF. Among its 900 promises reported in the Malayalam language press was the gradual enhancement of the current monthly pension of ₹1,500 to ₹2,500 by the time its term ends. Not to be outdone, the UDF has in its manifesto promised a pension of ₹3,000 and a monthly payout of ₹6,000 per household to Below Poverty Line families. These are only a part of the rain of promises.

Kerala Model is unsustainable

The manifestos have been received with scepticism by the public, for they could not but have wondered how the fresh expenditures will be funded. Kerala today has one of the highest levels of public debt per capita among India’s States. Without fresh resource mobilisation — of which intent there is no indication in either party’s manifesto —enhanced public expenditure assures higher levels of public debt in the future. The economics profession globally agreed that during the novel coronavirus pandemic the level of public debt ought not to hold back necessary public expenditure to aid relief and recovery. However, in the case of Kerala, we are talking of the structural feature of expenditures being elevated in relation to revenue. It is in this sense that the so-called ‘Kerala Model’, in which the State focuses on welfare, has been identified as unsustainable by economist K.K. George several decades ago. The State’s political parties have not addressed this issue and conduct themselves as if this is not important. Inter-generational debt shifting, i.e., leaving debt incurred by us to be paid by future generations, is not a trivial issue. It is justified when the borrowing creates capital assets that generate revenues into the future, but when the borrowing is undertaken to finance our own consumption, leaving behind nothing but the debt for them is unconscionable. Actually, even if physical assets are created, they should generate adequate revenue. A blanket refusal to turn in a surplus by charging for public services is, therefore, problematic. It is this consideration that leaves the public particularly sceptical of the Kerala Infrastructure Investment Fund Board (KIIFB) initiative. Perhaps the Kerala government has done due diligence that demonstrates its financial viability but it has an obligation to lay the facts of the business model, in particular the forecast stream of revenues, on the table.

A different welfarism here

Individual well-being enabled by public action is a perfectly legitimate aspiration in a democracy. However, what distinguishes the decades’ long practice in Kerala is that it is a form of welfarism far from what is generally understood when we speak of a welfare state. Though originally imagined by the U.S. President, Franklin D. Roosevelt,  during the Great Depression, it was in western Europe that the welfare state achieved fruition. Its distinguishing feature is the provision of health and education by the state. There are pensions too. So, it is not as if the provisions in Kerala are improper in any way. What distinguishes a genuine welfare state from the Kerala Model is that in a genuine welfare state, benefits are financed by taxes. There were two considerations underlying this design in the original. The first was the crucial issue of financial viability. The second was to give citizens a sense of ownership of the programmes, signifying that the welfare state is not some sort of munificence extended to them by the political class but something they had contributed to themselves. Thus, the British institution of the National Health Service, the envy of richer countries which not even Margaret Thatcher dared dismantle, has eventually been paid for by that country’s workers. The tax to national income ratio in the United Kingdom is among the highest in the world, and has remained consistently over 40%. Kerala’s is not just much lower but has often been lower than in the other southern States.

Point of coverage

Before moving on, it is worth noting that in Kerala, there is also the question of coverage. The State has one of the highest percentages of children in private schools and out-of-pocket expenditure on health in India. Whether this is due to inadequate provision or the poor quality of service in the public sector is to be ascertained, but at least as far as schooling is concerned, it is difficult to believe that the government cannot provide schooling of the highest quality. The feature is more likely related to inflexible and shoddy governance. The issue of funding is not irrelevant either. For political parties, the temptation to be seen to be handing out welfare payments is too great to resist, which, in the absence of a will to mobilise resources, can only mean that there will be less for health and education. The meagre resources mobilised end up being spread thin, across innumerable government schemes.

On employment generation

It is difficult to imagine that Kerala will be able to permanently fund its welfare schemes through borrowing. At least, that would only be possible at ever rising interest rates, leading to a higher fiscal burden, if not actually a debt trap. At that stage, the welfare schemes would have to end, or a Herculean effort to raise revenues would have to be initiated. In other words, there is no alternative to funding welfare schemes via higher taxation or some other source of public funding (such as oil revenues in Saudi Arabia). Funding can also be through contributions made by workers, as in the case of Europe’s welfare states. However, this will be possible only if everyone is employed for at least some stage of their lives. For this, economic policy must ensure that levels of employment remain high. There is little awareness of this in Kerala at the level of either state or civil society. Seen from the manifestos in this forthcoming Assembly election, the political parties have no programme for employment generation. To place the enormity of the challenge in perspective, on the occasion of the presentation of the last Budget, the government stated in the Legislative Assembly that the unemployment rate for youth in Kerala is 36%. This is much higher than the national average.

Broaden the tax net

While it is clear that public resource mobilisation in Kerala falls short of its welfarist ambition, it is not widely known that even this reluctant mobilisation is skewed in its impact. Jose Sebastian, an independent observer of the State’s public finances, has pointed out that the State’s taxes largely derive from four sources: levies on liquor, lotteries, petrol and motor vehicles, respectively. These are items of mass consumption, implying that it is the working class that contributes most to resource mobilisation. This implies, that as the revenue goes to the provision of public services, it is the working class that financially supports the welfarist economic policy stance of the political class, with the middle class benefiting disproportionately. In Kerala, the tax net needs to be broadened from the point of view of both equity and buoyancy. This could start with a focus on the conspicuous consumption underlying the rampant construction of often unused luxury houses in the State. Steeply progressive taxation of property stands out by its absence. It was once understood to be the hallmark of socialism.