Wealth-generating economic activities – not finance – is the answer

As a result of financialization, Kerala government is operating under the misconception that finance is the key to economic development, exemplified by the non-stop efforts to get loans from various sources [2, 3, 4].

The Times of India report, “Fiscal repair needs more than cuts” (July 8, 2016), says, “Isaac is expecting a 25% increase in tax collection to mitigate this crisis.” “The basic reason for the present present fiscal crisis is the alarming growth in non-plan expenditures comprising salaries, pension, teaching grants given to private/ aided education institutions,” said B A Prakash [2], chairman, fifth finance commission.

The total salary and pension expenditure during 2015-2016 was Rs 36,569 crore ($5.48B). “This accounts for 82% of the total tax and non-tax revenue of the government. With the implementation of pay and pension revision, the additional financial commitment required is estimated as Rs 54,754 crore ($8.21B),” Prakash said.

In a nutshell, Kerala has an overdeveloped government for an underdeveloped economy.

The report adds, “The CII (Confederation of Indian Industry) also expects the budget to support revival of crisis-ridden public sector undertakings and traditional sectors like cashew.”

There seems to be fundamental flaws in the expectations and role of budget and finance with the Kerala government and various agencies. Proper role for finance in an economy is to be an enabler for wealth-generating activities. However, Kerala economy is in deep financialization. Hence, normal expectations will not work. Much of Kerala economy consists of:

  1. Rent seeking” activities
  2. Social welfare schemes
  3. Operation of non-viable public sector units
  4. Under-performing education industry

Lack of operational capabilities, know-how and skill-deficits in critical government agencies are the main contributors for the malfunctioning state economy. Routinely seeking external loans for development projects while there is a huge amount of bank deposits in the state is a manifestation of this problem.

While the governments takes credit for the welfare schemes, the tax system is extremely regressive. Significant part of state tax revenue is from state lottery and alcohol sales [2], while income tax share is non-existent.

The planned “Kerala Bank” [2, 3, 4], consolidating the district co-operative banks, is a potentially good idea to help with capital formation. But the current profligate ways of the Kerala government will have to change. Currently, borrowings are channeled into consumption or unproductive development projects, If the “Kerala Bank” is used for similar borrowing and spending, the result will be a catastrophe.

Kerala economy is beyond repair, and need to be replaced. The real solution is to develop and implement a wealth-generating industrial development program as anchor for a balanced economic development.

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