Special Correspondent

Says large revenue and fiscal deficits show macro-fiscal imbalances

Says there is decline in net availability of funds for infrastructure development Says investments in loss-making companies have not been sustainable Recommends compressing of non-developmental revenue expenditure

THIRUVANANTHAPURAM: The Comptroller and Auditor General (CAG) has expressed concern over the state of Kerala's finances and has asked it to take measures to prevent the State from falling into a debt trap.

In its report (Civil) for the year ended March 31, 2005, which was presented to the Assembly on Thursday, the CAG pointed out that large revenue and fiscal deficits year after year showed continued macro fiscal imbalances. Though it was not uncommon for the State to borrow for widening its infrastructure and for creating income-generating assets, an ever-increasing ratio of fiscal liabilities to GSDP with a large revenue deficit could lead the State into a debt trap.

There had also been decline in net availability of funds for infrastructure development from its borrowings, as a larger portion of these funds were being used for debt servicing and on establishment expenditure.

The continuously declining low return on investment indicated an implicit subsidy and use of high cost borrowing for investments, which yielded very little.

The investments in loss-making companies were not sustainable. The balance of current revenue (BCR) of the State also continued to be negative. The BCR played a critical role in determining its Plan size and a negative BCR adversely affected the same and reduced availability of funds for additional infrastructure support and other revenue generating investment.

The report stated that revenue receipts during the year grew by 14.3 per cent to Rs.13,500 crores from Rs.11,815 crores in the previous year.

The revenue expenditure during the year grew by only 10.8 per cent, which resulted in a marginal reduction in the revenue deficit which stood at Rs.3,669 crores compared to Rs.3,680 crores in 2003-04.

During the current year, the contribution of the State's own taxes in its revenue receipts declined from 68.5 to 66.4 per cent. The contribution of Central tax transfers and grant in aid increased from 24.7 to 27.5 per cent. Sales tax was the main source of the State's own tax revenue having contributed 75 per cent followed by Excise (8 per cent) and taxes on vehicles (7 per cent).

The revenue expenditure during the year constituted 95.1 per cent of total expenditure. On an average, capital expenditure formed only 4.3 per cent during the five years from 2000 to 2005.

The fiscal liabilities increased by 70 per cent during the five years and stood at 43,697 crores in 2004-05 which was 3.2 times the revenue receipts. At the end of 2004-05, the fiscal liabilities stood at the level of nearly 44 per cent of GSDP. These liabilities were cause of concern for sustained growth and development in the medium to long-term basis.

The CAG asked the State to strive to reduce revenue deficit/fiscal deficit by compressing non-developmental revenue expenditure, additional resource mobilisation through tax reforms and prudent debt management in order to achieve the target envisaged in the Kerala Fiscal Responsibility Act of 2003 zero revenue deficit and fiscal deficit of 2 per cent of GSDP by March 2007.