The post-demonetisation revenue crunch is likely to force the Central government to slash by 40 per cent its discretionary transfers to the State.
The cut in funds is feared to directly impinge on the health, education and environmental conservation and other sectors.
About 44 per cent of the total funds transfer from the Centre to the State is in the form of grants and the rest comes as tax devolution. This transfers comprise Central grants to the State as well as its own developmental spending. The State would feel its pinch soon. A drastic cut in the fund transfers would have a serious bearing on the State, sources said.
Already reeling
It would be a double whammy for the State. The cash-intensive sectors such as retail trade, hotels and restaurants, and transportation that account for over 40 per cent of the State’s economy and the primary sector that constitutes 16 per cent are already reeling from the crisis.
The expert committee appointed by the State Planning Board to study the fallout of the reform on the economy has already cited that a revenue fall coupled with decline in Central transfers would either mean a bigger deficit or a contraction in expenditure. The contraction in expenditure would lead to a slowdown that has already set in following demonetisation.
Limited options for Centre
The committee has pointed out that in the current context, the Centre has limited options to overcome the adverse implication of the reform on its fiscal health and to end the imbalance, it would essentially have to cut its own discretionary funds transfers to the States, including Kerala.
The own tax revenue to GSDP ratio has declined from 7.06 per cent in 2011-12 to around 6.5 per cent by the end of 2015-16. The present government had proposed to increase the tax-GSDP ratio to 6.85 per cent. Going by the slump in economic activity and the revenue loss due to fall in stamp duty and motor vehicle tax collection, it is highly unlikely to attain the 19 per cent target in the current year. This steep fall in revenue is feared to further intensify the crisis. The government would have to devise new plans to overcome the crisis, sources said.
