Balagopal’s fiscal conservatism could push Kerala into post-Covid recession

Kerala’s 2024-25 budget documents are littered with proof that K N Balagopal is proving to be one of the most conservative finance ministers Kerala had seen. The absolute antithesis of an adventurous Thomas Isaac.

On the one hand, Balagopal was not able to mobilise the revenues he had estimated for 2023-24. Revenues, especially GST collection, have fallen way below what was anticipated. And on the other, he has effected massive spending cuts in sectors that benefit people directly, especially health, education, social welfare and agriculture. Subsidies, too, have been slashed.

The net effect on paper was a fiscal deficit of 3.45%, which is lower than his original estimate of 3.50% of GSDP. Balagopal clearly wanted to paint a picture of fiscal consolidation, show himself up as an exemplar of prudence. But on the ground, Balagopal’s conservative urge to display low deficit figures could prolong the recession that has already slowed down Kerala.

Balagopal himself has admitted that there is recession. He cited the fall in cement prices as proof. The construction sector in Kerala is the lodestar economists look for to gauge the state’s demand levels.

Fuelling slowdown
The fall in revenues this fiscal looks like an allergic reaction to Balagopal’s resource mobilisation efforts in his last budget, particularly the two-rupee fuel cess. Even a marginal increase in fuel prices is highly contagious, it heats up the prices of most other commodities.

This cess-induced higher prices could have caused a fall in demand, which in turn reflected in the fall in revenues this fiscal. Even then, Balagopal has not bothered to roll back the cess.

Revenue slide
Balagopal estimated a 12.6% growth in state’s own tax revenues in 2023-24. What he got was just a 7% increase. In the case of GST, the finance minister was confident of a 21% increase in collection.

As it turns out, he will be left with a growth of less than 10%. The final CAG figures is expected to be even worse. This is also a reminder that the Centre alone cannot be held responsible for Kerala’s fiscal crisis.

Conservative’s antidote
Now that his revenues were not rising as expected, Balagopal did what only the most conservative of finance ministers do. He slashed government spending in sectors – social and economic – that would have benefited the common man the most. Spending on both social and economic services did worse than stagnate, it went negative.

Social services – (education, health, SC/ST welfare, nutrition, water supply, sanitation) was the worst hit. It saw a fall of nearly Rs 5000 crore (Rs 4813 crore) compared to 2022-23. Spending on economic services (agriculture and rural development) fell by nearly 700 crore relative to the 2022-23 fiscal. Capital outlay on both these sectors also showed a fall compared to the 2022-23 fiscal.

Innumerable studies have shown that public spending in these areas boost demand, which in turn spurs economic growth.

Subsidies, too, have shown a marked decline. Balagopal had budgeted Rs 2190 crore for this fiscal but ended up paying just Rs 1512 crore, less than 70% of what he had promised. This could explain why Supplyco stores are devoid of subsidised items.

Unnecessarily studious
Curiously, Balagopal was under no legal obligation to slash spending and lower fiscal deficits to the levels he had brought it on paper. For 2024-25, he has set revenue and fiscal deficit targets of 2.12% and 3.46% respectively when the consolidation roadmap for Kerala is fine with higher deficits: 2.16% and 3.46%.

In his eagerness to present an illusion of consolidation, Balagopal is threatening a post-Covid recession.