Why is Kerala Falling Into an ECONOMIC crisis? Why did Supreme Court intervene? Explained in Detail

Summary

The 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.