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R. Ramakumar

BUDGET MAKING for a State in India in the neo-liberal era is indeed an unenviable task. On the one side, the terrible state of finances has seriously undermined the ability of States to meet rising obligations in social services. This situation has been primarily due to the inadequacy of the volume of resource transfers from the Centre to the States. On the other hand, the autonomy of a State in policy making is getting increasingly eroded. The Centre has been forcing the hands of States, directly and through statutory bodies like the Finance Commission, by linking resource transfers to successes with fiscal adjustment. The VAT system has been an assault on the rights of States to raise revenues by imposing higher taxes on luxury commodities. Given such constraints, most States have fallen in line with the mainstream neo-liberal ideas of fiscal contraction in their budgets.

In this context, Kerala's new budget for 2006-07 presented by Finance Minister T. M. Thomas Isaac has a refreshing air about it. The budget marks a sharp retreat from the disastrous neo-liberal thrust that the previous United Democratic Front Government had given to the State's development policy. It has shown that to protect people's livelihoods, States need to display enormous political will to challenge the policies of the Central government, while concurrently using the limited space available to design alternative policies.

The budget has openly rejected the "Kerala Fiscal Responsibility Act 2003" as impractical and anti-people. In what has been termed by many as a "historic" step, Kerala has pledged to amend the Act in ways that keep with the spirit of the Left Democratic Front manifesto. The position of the LDF has been that a solution to the fiscal crisis has to be revenue-led and not based on deficit-targeting, which more often than not results in a cut in the funds for the poor and vulnerable.

It is certain that the decision to amend the fiscal responsibility legislation would attract hostile reactions from neo-liberal policy makers at the Centre. There are fears that the Centre may resort to cuts in resource transfers to Kerala. However, it appears that the LDF Government is getting ready to lock horns with the Centre on this issue. At the core of the dispute would be the question whether a democratically elected State government can be denied constitutionally provided resource transfers owing to its refusal to reduce spending for the welfare of its people. To be sure, the success of the proposed legislative change in Kerala is contingent on the mobilisation of mass support in its favour across the country.

Revenue mobilisation

A major feature of the budget is its efforts for revenue mobilisation. According to Dr. Thomas Isaac, Kerala would try to raise the share of revenue receipts to NSDP from the present 13 per cent to 17.5 per cent by 2010 (after implementing the Pay Commission report). The budget expects to mobilise revenue through major reforms in tax administration and a mass mobilisation campaign among people to overcome the tax resistance mindset. Dr. Thomas Isaac said he was inspired by the popular movement for mobilising tax revenues in Venezuela, which helped to raise the tax-GDP ratio significantly.

In a welcome step, the budget has raised the taxes on many luxury items. A new schedule of luxury goods taxable at 20 per cent has been announced, which includes "health drinks," mineral water, and aerated soft drinks such as Pepsi and Coca-Cola. A per head tax has been imposed on members of luxury clubs. Calling for a fairer share for the State of the prosperity in the tourism sector, the budget has made many tourism-related items taxable. The tax on gold, an important commodity of consumption in Kerala, has been raised. It has also been announced that the government would not disinvest or sell any profit-making PSU to raise revenues.

To correct another important anomaly in Centre-State relations, the budget has demanded a major change in the existing VAT design. The VAT system had reduced the average tax on luxury commodities in Kerala from 20 per cent to 12.5 per cent. The consequent shortfall in revenues has been reported to be Rs.693 crore. The budget has declared that it would demand treating VAT rates as only floor rates, so that States would have the right to charge higher rates on selected goods.

Another important area where the budget has made bold efforts to design autonomous policies is agriculture. The agrarian crisis in parts of the State has adversely affected the livelihoods of thousands of farmer households. The proximate cause of the crisis is the sharp fall in prices of tea, coffee, pepper, and cardamom. The solution to this problem is, of course, complicated and beyond the control of the State government. On its side however, the Central government has refused to address the free trade-related issues of livelihood. The Centre has also excused itself from implementing the recommendations of the National Commission on Farmers (NCF) to address the distress. Even then, the State government's budget has displayed commendable responsibility in taking relief to the farmers to the maximum extent possible.

First, an Agricultural Debt Relief Commission is to be formed. This Commission would be a quasi-judicial body with powers to declare a region or a crop in a region as calamity-affected and submit proposals for debt relief. It would have powers to cancel usurious loans from private moneylenders once and for all, and with no compensation.

Secondly, a Farmer's Commission is to be constituted. This Commission would suggest measures to ensure agricultural price stability and raise agricultural investment in the State. A Price Stabilisation Fund would be set up in the State and the Commission would guide the activities of the Fund.

Thirdly, there is a serious exploration of the possibilities of reducing annual interest rates on crop loans to 4 per cent. The budget has declared that the government could consider providing crop loans at 4 per cent as an incentive for repaying loans at the right time.

Fourthly, the budget has exempted farmers cultivating tea, coffee, pepper, and cardamom from agricultural income tax for one year. Coconut and coconut products have also been exempted from all taxes for a year.

Fifthly, the government would continue with the scheme for supplying rice through the Public Distribution System at Rs.3 per kg.

Through the Kerala budget, the LDF Government has chosen a developmental path sharply divergent to that of the Centre. It has underlined that political will is the crucial factor that drives progressive social changes in Left-ruled States. The Left has also strongly displayed its seriousness about implementing in its States what it demands at the Centre.

(The author is Assistant Professor, Tata Institute of Social Sciences, Mumbai.)

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