Economy and Budget: Kerala may find the going tough

Thiruvananthapuram: Kerala Chief Minister Oommen Chandy will find the going tough as he presents the State Budget for 2016-17 to the Assembly on Friday.

It is not just the anticipated protests by the Opposition demanding his resignation: Kerala’s economy is on a tailspin. Revenue receipts have fallen below expectations for three years in a row. But Mr. Chandy will be tempted to present a populist Budget this being the election year.

According to the pre-Budget Economic Review 2015 prepared by the State Planning Board and presented to the House, the coming years are going to be difficult. The lower growth of the economy and the fall of commodity prices have begun playing out in the mobilisation of tax revenue by the State.

While 2015-16 has seen larger flow of Central resources following the larger award of the Fourteenth Finance Commission- both the share in Central taxes and grants- it may not be as bountiful in the next fiscal.

Overall, the economy of Kerala is facing head winds both domestic and international. The external environment that has spurred the economy for over two decades has turned distinctively negative with the commodity prices hitting historic lows and decline in foreign tourist arrivals. More pain may yet come if remittances start their southward movement with oil exporters dipping into their reserves. On the expenditure side, the cumulative burden of pay arrears will eat into whatever resources that can be mobilised, leaving little room for manoeuvres of any kind, the Review says.

Kerala economy has been growing at rates higher than the national economy the last three years (based on the GDP at 2004-05 prices). However, with the Centre revising the base year for calculations, the growth rates turned negative.

Agriculture in Kerala has been hit by declining commodity prices. Agricultural growth rates in 2013-14 and 2014-15 have turned negative, largely owing to the sharp fall in the prices of rubber and coconut and the related fall in production. Rubber and coconut account for almost two thirds the total area under crops and the global commodity price fall has hit Kerala hard. The growth rate shown for the sector would have been much lower but for the higher growth of milk and meat production in the State.

Construction was a high growth sector till recently but has not shown much growth during the last three years. Along with construction, mining and quarrying has also taken a hit reporting growth rates of -16 and -21 per cent in 2012-13 and 2013-14 respectively.

It may be recalled that the analysis of growth drivers by the Kerala Perspective Plan 2030 had identified construction as one of the drivers. It was stated that the period beyond 2001 saw construction, transport, storage and communication, trade, hotel and restaurants, real estate ownership, business and legal services, and other services boosting growth. These sectors witnessed high growth riding on the strength of tourism and remittances.

Remittances have not yet started falling but threats loom large on the horizon as the employment situation in West Asia has been stressed with the drastic fall in the price of crude oil. Interestingly, these changes in growth rates of the different sectors correspond to the analysis carried out in the Kerala Perspective Plan 2030. It was shown that any fall in remittances, tourism and welfare spending will take growth to lower levels and that the magnitude of the fall in growth can be large.

Kerala Perspective Plan 2030 did not envisage the impact of terms of trade shock. With the precipitous fall in commodity prices and with many of them hitting historic lows of recent decades, the dependence of the State on a few commodities has made it vulnerable to external shock.

While the crop sector accounts for only around 10 per cent of the Gross State Value Added, the ability of the State Government to support crisis ridden agriculture is rather limited. Also, it may be worth remembering the Brazilian coffee experience of yore: the more the government supports the more is produced and both the sector and government wade into deeper crisis. Kerala has become a high cost producer and the market rule is that they may find it difficult to survive unless productivity increases. Government support has to be redesigned to encourage productivity growth, says the Review.