There is a compelling argument for the continuation of revenue deficit (RD) grant to Kerala under the 16th Finance Commission, given the State’s focused spending on the creation of ‘human capital’ under the Kerala Model, according to a study by the Gulati Institute of Finance and Taxation (GIFT).
The study, by GIFT director K.J. Joseph., was presented in a recent seminar at GIFT, chaired by former Union Cabinet secretary K.M. Chandrasekhar and attended by senior economists. Kerala’s thrust on “export-oriented human capital production,” that benefits the nation, other States, and Kerala society through migration of trained professionals in multiple sectors and remittances, scarcely contributes directly to the tax revenues of the Kerala government, according to the study.
As per the Kerala Migration Survey (GIFT 2024), 22 lakh Keralites have migrated to 183 out of 197 countries in the world, according to the study. They contributed about 23% of the total remittances to India in 2023, the highest by any State; Kerala accounts for only 2.76% of the population, but 23% of the remittances.
No subsidy
While India’s trade policy has the provision for 7% subsidy for service exports, Kerala’s export of human capital does not receive any subsidies. The export-oriented human capital development strategy hardly made any direct contribution to the tax revenue of the State.
If States can be divided into two types, Type 1 would be those specialising in goods such as primary commodities, manufactures and minerals that are tradable, and taxable. Kerala would be a Type II State, focussing on the non-tradable; in its case, human capital which is not taxable. At a time when knowledge is the most important resource, the human capital created by Kerala in the form of nurses, doctors, teachers, lawyers, IT professionals, among others, and the knowledge embodied therein have contributed to the development of other States, the study said. At present, about 57% of Kerala’s revenue receipts is spent on salary/ wages and pension of which about 60% is for teachers. Thus the Kerala model added to the fiscal stress of the State.
“From the perspective of Vision 2047, the Centre needs to recognise Kerala’s role in accomplishing the national vision and the price it paid for, sooner than later through the 16the Finance Commission,” Dr. Joseph said.
The GIFT study observed serious issues with the criteria used for devolution of the divisible pool among the States, especially the most important criterion – income distance – as the study noted an inverse relation between per capita income and the tax base of States.
It also argued for the transformation of the Fiscal Responsibility and Budget Management (FRBM) Act into the Fiscal Responsibility and Borrowing Management Act in the context of evolving federal fiscal relations and Vision 2047.
“For fiscal stability, the FRBM Act aimed at zero revenue deficit and the fiscal deficit at 3%. If revenue deficit is ensured at zero level, why should the fiscal deficit be limited to 3%? Why should one worry about borrowed money if it is invested in such a way as to ensure that the interest payment is lower than the return from the investment made through borrowed funds? What matters therefore is not the amount of borrowing but how it is utilised, and managing or monitoring borrowing is not a hard task in the era of IT and AI,” he said.
Published – December 08, 2024 07:08 pm IST