Why is Kerala Falling Into an ECONOMIC crisis? Why did Supreme Court intervene? Explained in Detail
Summary
TLDRThe state of Kerala, India, known for its high development and literacy, is facing an unprecedented financial crisis, likened to Sri Lanka's economic turmoil. With a staggering debt of ₹1.11 lakh crores, Kerala struggles to pay salaries and pensions, affecting over 3.5 lakh government employees and 55 lakh social security beneficiaries. The crisis stems from excessive short-term spending, inefficient tax collection, and off-budget borrowings, exacerbated by reduced shares from the central divisible pool of taxes. Kerala's finance minister appeals for central assistance, while the video underscores the importance of understanding state finances and economic indicators for responsible citizenship.
Takeaways
- 🔴 Kerala is facing a severe financial crisis, with difficulties in paying salaries and managing state expenses, leading to a situation comparable to economic crises in other regions.
- 🛠 The Kerala government has accrued a significant debt, amounting to over 1 lakh crore, prompting the Finance Minister to seek assistance from the Union Finance Minister.
- 💸 Kerala's financial woes are partly attributed to using borrowed funds for day-to-day expenses, including salaries and pensions, leading to delayed payments and suspended social security schemes.
- 🖥 Previous warnings about economic challenges facing Indian states, highlighted in a 2022 RBI case study, underscore the importance of paying attention to state finances.
- 🛡 Kerala's financial strategy is criticized for excessive short-term spending and insufficient investment in long-term infrastructure, contributing to its debt issues.
- 📈 The state's revenue collection has significantly declined post-GST, exacerbating its financial instability.
- 💰 Kerala receives a substantial revenue deficit grant from the central government, challenging the notion of unfair treatment by the Centre.
- 💵 The allocation of taxes from the central divisible pool to states, which has decreased for Kerala, is a point of contention, highlighting disparities in financial distribution.
- 📊 Off-budget borrowings have played a role in Kerala's financial predicament, with recent changes in accounting for these borrowings affecting the state's fiscal health.
- 💳 The situation in Kerala underscores the need for citizens to be informed about economic indicators and government spending to prevent similar crises.
Q & A
What is the current financial situation of Kerala?
-Kerala is facing a severe financial crisis, with the state being on the verge of bankruptcy. It has accumulated a loss of 1, lakh 110,000 crores and is struggling to pay salaries and pensions, using borrowed funds to cover state expenses.
How has Kerala's economic crisis impacted its employees?
-The salaries of 3.5 lakh government employees have been delayed, and those who received their salaries are unable to withdraw the entire amount. Additionally, social security schemes for 55 lakh people have been put on hold.
What is the role of the Net Borrowing Ceiling (NBC) in Kerala's financial situation?
-The NBC is a limit imposed by the central government on states, restricting how much they can borrow in a financial year. For Kerala, the NBC for FY 2023-24 stands at 3,244 crores, but due to excessive borrowing in previous years, the center has cut 3,140 crores from Kerala's share, leading to a total borrowing limit of 2,932 crores for the year.
Why is Kerala's financial crisis relevant to citizens?
-The financial crisis in Kerala serves as a cautionary tale for citizens to pay attention to their state's finances. Understanding the economic health of a state is crucial for citizens to make informed decisions and to hold their governments accountable for fiscal responsibility.
What are the key economic indicators used to assess a state's financial health?
-Key economic indicators include capital outlay as a percentage of net expenditure, committed expenditure as a percentage of revenue receipts, interest payments to revenue receipts, and the balance between short-term expenses and long-term investments.
How has Kerala's spendthrift nature contributed to its economic crisis?
-Kerala has spent more on short-term expenses rather than long-term investments, leading to increased spending without a corresponding increase in income. This has resulted in high committed expenditure and interest payments, contributing to the state's financial difficulties.
What is the issue with Kerala's tax collection efficiency?
-Kerala's tax collection efficiency has declined, with the state collecting less revenue per 100 rupees of state income post-GST implementation and during the COVID-19 pandemic. Inefficient tax collection has led to reduced revenue and increased reliance on borrowing.
What is the divisible pool of taxes and how does it affect Kerala's funding?
-The divisible pool of taxes refers to a portion of the total tax revenue collected by the central government that is eligible for distribution among states. Kerala argues that its share in this pool has decreased significantly, leading to a shortfall in funds.
How has the inclusion of off-budget borrowing affected Kerala's debt situation?
-Off-budget borrowing, where public sector units raise funds on behalf of the state, has contributed to Kerala's high debt levels. Although this debt does not officially increase the state's borrowing limit, it is indirectly the government's responsibility and can lead to uncontrollable debt growth.
What lessons can be learned from Kerala's economic crisis?
-The crisis highlights the importance of fiscal responsibility, the need for efficient tax collection, and the dangers of off-budget borrowing. It also underscores the role of citizens in monitoring their state's economic health and holding governments accountable.
What is the central government's response to Kerala's request for financial assistance?
-The central government has pointed out Kerala's financial mismanagement and has cut the state's borrowing limit based on past excessive borrowing. The central government also argues that Kerala is one of the most financially unhealthy states in India due to its high committed expenditure and interest payments.
Outlines
😟 Kerala's Financial Crisis Overview
Kerala, known as 'God's own country' and one of India's most developed states, is facing a severe financial crisis, akin to Sri Lanka's economic turmoil. The state has accumulated a staggering debt of 1.1 lakh crore INR, leading to difficulties in managing basic expenses such as salaries for 3.5 lakh government employees, pension payments, and social security schemes for 55 lakh individuals. Kerala's Finance Minister has reached out to the Union Finance Minister, highlighting the dire situation and seeking federal assistance. The crisis is a result of excessive borrowing, with the state now using loans to cover basic expenditures. A case study from the RBI had previously flagged such economic problems, emphasizing the importance of fiscal prudence for states. The situation underscores the need for citizens to understand and engage with the financial management of their states to prevent similar crises.
🔍 Analysis of Kerala's Economic Decline
The financial debacle in Kerala is attributed to several key factors, including mismanagement and inefficient fiscal strategies. The state's capital outlay, which is crucial for long-term returns through infrastructure investment, is significantly lower compared to other states. Kerala's committed expenditure, primarily on government salaries, pensions, and interest payments, is alarmingly high, limiting funds available for development and welfare projects. Additionally, Kerala has the highest interest payments as a percentage of its revenue, indicating excessive reliance on borrowing. Despite receiving substantial grants from the central government, Kerala's revenue collection efficiency has plummeted post-GST, exacerbating the fiscal shortfall. These factors, coupled with political disputes over financial management with the central government, have led to Kerala's current economic predicament.
📉 Factors Behind Kerala's Financial Unhealthiness
Kerala's financial struggles are also deepened by its high off-budget borrowings, which, although not reflected in the state's official accounts, significantly contribute to its debt. This practice has been criticized and curtailed by the central government, impacting Kerala's budget and borrowing capabilities. Kerala argues that recent changes in the finance commission's allocation formula, which now emphasizes more recent population data, unfairly penalize the state for its effective population control measures, reducing its share of the divisible pool of taxes. This, along with grievances regarding the allocation and management of off-budget borrowings, highlights the complexity of federal-state financial relations and the challenges in managing public finance in a diverse and populous country like India.
📚 Lessons from Kerala's Economic Crisis
The economic crisis in Kerala serves as a critical lesson on the importance of fiscal responsibility and the need for citizens to be aware of their government's financial management. It demonstrates the dangers of spending beyond means, particularly through off-budget borrowings, and the long-term impact such practices can have on a state's financial health. The situation in Kerala emphasizes the need for transparent and prudent financial planning and the role of informed citizenry in holding governments accountable. Moreover, it suggests that economic indicators should be a primary lens through which government performance is evaluated, beyond the usual political rhetoric. Finally, it calls for a balanced approach to fiscal management, where both investment in long-term development and careful borrowing are harmonized.
Mindmap
Keywords
💡Financial Crisis
💡Kerala Government
💡Net Borrowing Ceiling (NBC)
💡Fiscal Deficit
💡Committed Expenditure
💡Interest Payments
💡Revenue Deficit Grant
💡Tax Collection
💡Divisible Pool of Taxes
💡Off-Budget Borrowings
💡Economic Indicators
Highlights
Kerala is facing a severe financial crisis, on the verge of bankruptcy with a loss of 1,110,000 crores.
Kerala's financial situation is compared to that of Sri Lanka, with daily headlines about the financial crisis.
Kerala government is using borrowed funds to pay for state expenses, including salaries and pensions.
Salaries of 3.5 lakh government employees are delayed, and some cannot withdraw their entire salary amount.
Social Security schemes for 55 lakh people have been put on hold due to the financial crisis.
Kerala's Finance Minister has written to the Union Finance Minister about the state's grave financial situation.
The state's net borrowing ceiling for 2023-24 is 32,442 crores, but due to over-borrowing in previous years, the center has cut 3,140 crores.
Kerala was allowed to borrow 75% of 29,320 crores in the first 9 months of the financial year but exhausted this amount within the first 6 months.
Kerala's capital outlay as a percentage of net expenditure is significantly lower compared to other states, indicating a lack of investment in infrastructure.
Kerala's committed expenditure, mainly on salaries, pensions, and interest payments, is much higher than other states.
Kerala spent almost 20% of its revenue on interest payments for loans, a concerning figure compared to other states.
Kerala's fiscal deficit and revenue deficit are higher than other states, indicating poor financial management.
Kerala received 53,137 crores in Revenue deficit Grant from the central government, one of the highest in the country.
Kerala's tax collection efficiency has declined, with a drop from 12.4 rupees per 100 rupees of state income to 6.9 rupees post-GST and COVID.
Kerala argues that its share from the divisible pool of taxes has decreased significantly from earlier decades.
The 15th Finance Commission's criteria for distributing revenue among states have changed, affecting Kerala's share.
Kerala had one of the highest off-budget borrowings in the country, which is now being scrutinized by the center.
The central government has decided to include off-budget borrowings in the state's account as debt, affecting Kerala's budget allocation.
Lessons from Kerala's crisis include the importance of economic indicators, responsible spending, and informed citizen vigilance on government finances.
Transcripts
hi everybody the state of Kerala is
nearly bankrupt now the Kerala
government has been citing a lot of
financial crisis you would recall in the
state the state is now facing
difficulties when it comes to paying
salaries Kerala has run up a loss of 1
lakh 110,000 crores because Kerala is on
the verge of bankruptcy in a shocking
update a state that is known to be the
most developed and literal state of
India the state that is called as the
God's own country it is now facing an
economic crisis just like Sri Lanka you
open the newspapers in Kerala and every
day the headlines invariably on the
front page is about financial crisis
Kerala government seems to be in
financial crisis Kera Finance Minister K
balagopal has written to Union Finance
Minister nirmala sitaraman on the grave
financial crisis facing the state Kerala
is using borrowed funds to pay off the
state's expenses they don't have money
for pensions for salaries and it's
spending for months together that's the
state of Kerala as of last week salaries
of 3.5 LH government employees are
delayed the ones who got their salary
are not able to withdraw the entire
amount Social Security schemes of 55
lakh people have been put on hold and
now the state of Kerala is asking the
center to bail it out and if you're
wondering why politics and economics are
so important for you as a citizen I got
to tell you that in our case study of
2022 we presented a case study from the
rbi's research and this case study
clearly alerted everyone about this
ongoing econom iic problem in some
states of India and like I said in 2022
even today if you don't pay attention to
your State's finances your state will be
in the same condition as Kerala so if
you want to be a sharp citizen of
Economics or just a sensible citizen you
need to understand how did Kerala fall
into an economic crisis in spite of
being so educated and development
focused why couldn't the leaders of Cara
save the state from this crisis and most
importantly as citizens of India you
need to know the lessons that every
state needs to learn from the fall of
Kerala before we move on I want to
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in the
description to understand this fight
between the state and the center we need
to understand something called the net
borrowing ceiling or
NBC in very simple terms this is a limit
that is imposed on the states by the
Cent Cal government which puts a limit
on how much they can borrow in a
financial year this is decided by the
15th Finance commission and it has been
fixed at 3% of the state's GDP for fi23
and 24 so if Maharashtra has a gsdp of 1
trillion rupees then they can borrow or
take a debt of 3% of this 1 trillion
that is 30 billion rupees if this is
clear to you let us try to understand
why is the center not allowing Kerala to
borrow more you see for the fiscal year
of 2023 24 the net borrowing ceiling for
the state of Kerala stands at
32,44 cror but in the last few years
Kerala has borrowed
3,140 crores extra so this year the
center has cut this 3,140 crores from
kerala's share of
32442 cror this year so in total Kerala
could borrow
29,32 cror this year according to the
NBC limits of fi23 and 24 now another
rule says that a state can borrow 70 %
of the total NBC limit within the first
9 months of a financial year so Kerala
was allowed to borrow 75% of
29,32 CR that is
2,852 crores for the first 9 months of
its Financial year but somehow Kerala
has exhausted this amount within the
first 6 months of the financial year
itself so now they need another 15,000
crores more than the NBC limit to run
the state for the rest of the year and
this is where the tussle between the
state and the center started state of
Kerala where a r between the Kerala
government and the center has rupted
over financial crisis in the state
Kerala government seems to be in
financial crisis and they are blaming
central government for this are facing a
lot of uh Decisions by the union
government which ex uses our financial
resources there is a serious crunches
there on the other hand the center told
Supreme Court that Kerala is one of the
most financially unhealthy States Kerala
today with pin Vis sitting in jant man
in Delhi is the most badly economically
mismanaged state in in the country so
now the question over here is how did
Kerala suddenly fall into such a big
debt trap and what is the way forward
well the first reason for kerala's
downfall is its spendthrift in the wrong
direction how do we know this well we
looked at the economic indicators of
Kerala now pay very close attention to
this because you can use the same
framework to understand how your state
is managing its finances so firstly when
it comes to Kerala we looked at the
capital outlay as a percentage of of its
net expenditure as in how much money did
Kerala spend into building
infrastructure and Roads as compared to
its entire expenditure now why is it
important because 100 rupees invested in
capital outlay can give you a return of
250 rupees in the long run so while
Maharashtra spent 13.4% of its expense
into Capital outlay Tamil Nadu spent
12.14 and Kerala only spent
88.2% similarly the next variable to
check is its committed expenditure as a
percentage of Revenue receips in simple
words if you make one lakhs a month and
you have a compulsory expenditure of
20,000 rupees on rent 10,000 rupes on
groceries and 10,000 rupees in utilities
then your committed expenditure is
40,000 rupees right so just like that
committed expenditure in the context of
a state is the compulsory budget that
the government has to spend out of its
expenditure so just like this in the
context of a state committed expenditure
is the compulsory expense that the
government has to make out of its
Revenue this is usually on government
salaries pensions and interest payments
so if this committed expenditure is less
then it means that the state is
performing well why because if the
government has money left in its account
then it can use these savings into
building better infrastructure or it can
spend on welfare of the people so in
this variable while Tamil Nadu stands at
64% Maharashtra stood at 56% Gujarat
stood at 46% whereas Kerala stood at 70%
in fact in 2021 while other states had
an average committed expense of
54.9% of the revenue for Kerala it stood
at 82% so in the context of personal
finance it's like saying your salary is
1 lakh rupees and 70,000 of this money
is going into groceries rent and
utilities whereas your friends are only
spending 55,000 rupees this is the
status of Kerala with the second
economic indicator then the next
variable to check is interest payments
to revenue receipts as in how much of
the government's expense is spent on
interest payments for loans it's like if
your salary is 2 lakh rupees and you
spend 1.5 lakhs only on paying interest
for your home loan then it is obviously
bad right so more this interest payments
the worse it is for the state now if you
look at kerala's performance in 20 2122
while other states spent 13.38% of their
revenue into interest payments Kerala
spent
19.98% which is almost 20% of its
Revenue into just interest payments and
today if we compare interest payments to
revenue receipts of Kerala while Kerala
stands at 19% Maharashtra spent only 11%
Tamil Nadu spent 20% Karnataka spent 14%
And Gujarat spent only 14% so again
Kerala and Tamil Nadu are the biggest
Spenders on interest and as you can see
in this chart it was not only greater
than other states but it is even more
than the finance commission Target of
10% and lastly as you can see in this
chart both the fiscal deficit and the
revenue deficit is higher for Kerala
than for other states so clearly from
this entire analysis we could could see
that Kerala has spent more money into
short-term expenses rather than
long-term Investments and this has led
them to spend a lot more money without
an increase in income this is the first
problem with Kerala now some people
might make it political and say that you
know what bro the center must have
discriminated against Kerala so just so
you know Kerala is a recipient of 53,1
37 crores worth of Revenue deficit Grant
from the central government as
recommended by the 15th Finance
commission from 2020 to 2025 and this is
one of the highest in the entire country
so the question over here is in spite of
so much Grant suddenly how did Kerala
find itself in an economic crisis well
this is where we started digging even
further and here's where we found the
second major reason to be inefficient
tax collection so while Kerala
government collected 12.4 rupees per 100
rupee of state income from 1975 to 1986
after GST it declined to an extent where
it touched 8.2 rupees after 2018 and
further decrease to 6.9 rupees during
the covid year and during the same time
Kerala lost 25,000 crores because they
could not follow the new igst regime and
they could not Implement GST system
quickly so again the state government
was left with no choice but to take on
more debt these are the reasons why the
central government is calling Kerala as
financially the most unhealthy state in
India now the question is what is
kerala's justification for all this
because if so much allegations are being
put on Kerala then the state must have
something to say right well as it turns
out they do kerala's Finance Minister
argues that kerala's share has been
declining from something called the
divisible pool of taxes and this is
something that makes a lot of sense so
understand this carefully the divisible
pool of taxes refers to a specific
portion of the total tax revenue
collected by the central government
which is eligible to be shared between
the central government and its states
and if you look at this chart it usually
ranges between 30% to 40% for example
let let's Imagine India collected 1,000
crores in taxes in fi23 and 24 and let's
say 35.1% of this amount would be
distributed among the states so the
total divisible pool is 351 crores and
according to the 15th Finance commission
this 351 crores must be distributed
among the states according to this table
so according to this table Kerala will
get 1.92% that is 6.7 crores Maharashtra
will get 6.3% that is 22.1 crores
Karnataka will get 3.6% and so on and so
forth so Kerala over here argues that in
the 1990s Kerala was allocated
3.85% of this divisible pool but fast
forward to the 15th Finance commission
this share is almost halfed to
1.92% and this is the reason why Kerala
is facing a shortage of funds so this
breaks the question why is Kerala given
less share in this divisible pool and
how is the share decided in the first
place well this is done by the finance
Commission of India and they decide how
to split the revenue between states
based on income population size of the
state area and even tax collection of
the states as compared to each other if
this is clear let's understand why did
the 15th Finance commission distribute
money to the states differently if you
look at this chart with the 14th Finance
commission they give 17.5% weightage to
the 1971 population the 15th Finance
commission has changed it to zero and
just like this the weightage has been
changed for multiple parameters as seen
on the screen so the problem over here
that Kerala points out is that if the
finance commission is giving more
weightage to the 2011 data then
obviously it will get less money because
Kerala has less population and they
worked very hard to keep the population
in control so they say that if the
revenue of the state has been decreased
because of they controlling the
population then clearly Kerala is being
penalized by the center for controlling
the population so this way Kerala says
that they're receiving less taxes than
their fair share and lastly Kerala has a
problem with something called the
inclusion of off budget borrowing now I
know this sounds very very complex but
if you're listening to something complex
at think school all you need to
understand is a simple story so here it
goes imagine the government wants to
build a new Railway line which is a very
expensive project let's say this costs
10,000 crores now the government has
already reached its borrowing limit of
30,000 crores and now the center tells
them that they cannot borrow more money
so now what will the state do will it
keep quiet no as it turns out the
government could use a public sector
unit and then raise money so let's call
this PSU as National Rail infrastructure
limited so now the national rail
infrastructure limited goes ahead and
borrows money either from Banks or
through bonds now this money is not
shown as Borrowed by the government so
it doesn't officially increase the debt
of the state government but the catch
over here is that while paying back the
debt the government itself promises to
pay back this loan using its future
budget this means indirectly the
government is responsible for the debt
right but the hack over here is that it
won't appear in the government's budget
as direct borrowings this is the reason
why it's called off budget borrowings
okay so even though on paper the state
is not borrowing Beyond 30,000 crores in
reality in this case it has used a PSU
to borrow another 10,000 crores if this
is clear let's come back to our story
Kerala had one of the highest off budget
borrowings in the country if you look at
this chart while Kerala has 22% of its
off budget borrowings as a percentage of
the total borrowings Maharashtra and
Gujarat had almost zero off budget
borrowings and similarly as you can see
on the screen for sikim and Telangana
even they have very high off budget
borrowings so this is very dangerous
right because even though the debt is
not reflected in the state's account it
can grow uncontrollably through the PSU
borings because there isn't an NBC limit
on it well guess what this is the reason
why in March 2022 the center came up and
said listen guys both your borrowings
from the state as well as the off budget
borrowings will be considered in your
State's account as debt only so you
cannot hide this debt using the
instrument of off budget borings so now
if a state borrowed 1,000 crores extra
on top of their NBC limits then next
year they would get 1,000 crores less
from the center so suddenly the states
that had more off budget borrowings they
were in trouble and one of these states
is Kerala which suddenly got trapped
because their budget started to get cut
and Kerala argues that this move is not
fair and this does make sense because if
you want to rectify a problem in an
economy which is as complex as India you
cannot give a kneejerk reaction you have
to rectify this problem slowly and
steadily this is the reason why Kerala
got stuck in its debt trap and now they
need another 15,000 crores and this
brings us to the last part of the
episode and that are the lessons that we
need to learn from kerala's economic
crisis lesson number one people more
than the Hindu Muslim propaganda and all
the ridiculous things that go on in the
mainstream media it is important for has
to cut through this chaos and learn to
judge the government on the basis of
economic indicators so a kind request to
you is go and check as to how your state
is handling its finances because that's
where the real trouble will come number
two whether you are the king of Dubai
the state of Kerala or an ordinary
citizen spending beyond your means is
going to cost you very heavily in the
future in this case we saw this with
off-budget borrowings and lastly
whenever an economic crisis happens in
any state or any country for that matter
it is extremely important for us the
educated citizens to study the cause and
the effects of these crisis such that we
can keep an eye on our government so
that we don't make the same mistake and
I just hope I give you a perspective to
look at your State's economics using all
the concepts in this case study that's
all from my side for today guys if you
learn something viable please make sure
to hit the like button in order to make
you baba happy and for more such
insightful business and political case
studies please subscribe to our Channel
and don't forget to attend sharan's
personal finance Master Class using the
link in the description thank you so
much for watching I will see you in the
next one
[Music]
[Music]
bye-bye
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