Possibility that Kerala falls into the open after Onam, a sign of budgetary crisis?

Like any ordinary Malayali, the government of Kerala has also spent way beyond its means on this Onam.

On average, Kerala’s monthly expenses, planned and unplanned expenses together, are pegged at Rs 14,500 crore. In the first week of September itself, government expenditure crossed Rs 15,000 crore.

Government employees received a bonus of Rs 4,000, and those not entitled to a bonus received Rs 2,750 as festival allowance. In addition to this, these employees received an Onam advance of Rs 20,000, which was disbursed with the August salary paid in September. Nearly 4.5 lakh pensioners received festival bata of Rs 1,000.

According to the Ministry of Finance, there has been a 30 percent increase in salary and pension expenditure due to the salary review. Thus, additional employee benefits will weigh on the treasury like never before.

Then there were the lavish 14-item Onam free food kits, distributed to 87 lakh ration card holders for Rs 425 crore. Welfare pensions for two months were clubbed (Rs 3,200) and paid to 60 lakh recipients. Additionally, KSRTC received Rs 300 crore for salaries and pensions.

Finance Ministry officials say that compared to the last financial year, the additional expenditure necessitated by Onam exceeded Rs 6,500 crore. “That’s almost double what we paid last fiscal year,” a senior official said.

Representative image. Photo: IANS


3 The status of RBI facilities depends on

No wonder Kerala has resorted to Ways and Means Advance (WMA) to offset Onam’s generous expenses.

The WMA is one of three types of fiscal cushion, special bank accounts, created by the RBI that states can tap into in times of hardship; the other two being the Special Drawing Facility (SDF) and the Overdraft (OD).

The SDF is the money a state can secure by pledging the central government securities it has accumulated. Only after exhausting this option is WMA used. When even the WMA is not enough to finance daily needs, a state slips into the DO.

Finance Minister KN Balagopal assured on Sunday that there is no need for Kerala to go for the OD.

Why WMA is not a cause for concern?

However, using WMA is nothing out of the ordinary. States routinely opt for the facility. It is not because a State opts for the WMA that it finds itself in a deep and irremediable economic mess.

Based on their unique revenue and capital expenditure patterns, the RBI has established a daily WMA limit for each state. For Kerala, it is Rs 1,683 crore. For states like Uttar Pradesh and Maharashtra with high capital and revenue expenditure, it is Rs 5,680 crore and Rs 4,686 crore respectively.

The RBI has envisioned the WMA facility as a method to fund the temporary cash flow mismatch and it only becomes a problem if the states see it as a cash cow to fund its long term needs.

empty chest

Representative image.


When is OD a sign of poor management?

The thing is, even going OD for a few days is not a sign of fiscal meltdown.

As per RBI regulations, state governments can be overdrawn (OD) for 14 consecutive days. A state government can be in DO for a maximum of 36 days per quarter, or 144 days per fiscal year.

However, if the OD exceeds 100% of the WMA limit (Rs 1,683 crore per day in the case of Kerala) for five consecutive working days for the first time in a financial year, the RBI will advise the state to lower the OD. level within 100 percent of the WMA limit. And if such a high level of borrowing occurs a second or more time during the financial year, the RBI will immediately stop all payments to the state.

It is not anyone that Kerala is so financially strained that the RBI will shut the door in their face.

Has Kerala ever been in OD?

Like other states, Kerala also occasionally depends on WMA and OD facilities.

Last Onam season in September, Kerala had been using WMA for 10 days, borrowing an average of Rs 971 crore per day from the RBI. One of these days WMA was not enough and Kerala entered OD. On that day, in addition to WMA, he had earned Rs 322 crore (well below the 100% limit of Rs 1,683 crore) using the OD facility.

Three months earlier, in June 2021, Kerala entered OD for 12 consecutive days, and even then the average daily borrowing using the OD facility was only Rs 262 crore. At this OD borrowing scale, Kerala could have borrowed for 14 consecutive days without a whisper from the RBI.

However, in September 2020, the Onam season, when COVID was at its peak, Kerala had used WMA 29 times, borrowing an average of Rs 1,137 crore almost daily that month from the RBI. During this month, WMA proved inadequate for nine of those 29 days and Kerala switched to OD for those days, borrowing an additional Rs 358 crore on each of those nine days, still well below the limit of 100% that RBI is. preoccupied by.

Why could the budgetary distress be temporary?

But demonstrating that such fiscal imbalance is seasonal and not permanent, Kerala did not have to use even SDF, forget WMA and OD facilities, in October 2020.

Although Kerala seems to be under unprecedented stress in September this year, it still looks better compared to 2021. In 2021, Kerala used WMA facility 108 times and was forced to take OD facility 16 times.

This year till June, for which RBI figures are available, Kerala has used WMA facility only 19 times and not one time to resort to OD facility.

empty chest

Representative image.


What message does June 2022 have in store for Kerala?

Unlike 2021 when WMA was heavily used, Kerala in terms of revenue looks better this year.

For six consecutive months, monthly GST revenues nationwide have crossed the Rs 1.4 lakh crore mark. This is also reflected in the collections of TPS from Kerala. Compared to August 2021, Kerala saw a 26% rise in GST collections in August; from Rs 1,612 crore to Rs 2,036 crore. In July, growth was 29%.

The growth in June this year is perhaps a sign that Kerala is not in as dire a situation as claimed. In June 2021, GST collection was Rs 998 crore and this was the month when Kerala had to use WMA almost daily and slipped into OD for 12 consecutive days.

However, in June, GST collection soared to Rs 2,161 crore, a whopping 116% increase. Result: Kerala didn’t even have to use the SDF facility, let alone WMA and OD. And since this year’s Onam, after two muted COVID years, was celebrated with a certain gluttonous fervour, it is almost certain that the tax revenue figures for at least August and September should acquire giant girths.

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