THIRUVANANTHAPURAM: Finance Minister K M Mani would do well to turn away from the rosy visions painted by former Finance Minister T M Thomas Isaac and the Comptroller and Auditor-General. Both say that the state’s debt is sustainable, but this hunky-dory image is highly suspicious at least for one reason: The ratio of revenue deficit to fiscal deficit is rising disproportionately.Thomas Isaac’s optimism springs from a positive Domar Gap (the difference between the nominal GSDP growth rate and the average interest rate). The state’s estimated GSDP growth rate during 2011-12 is 15.40 per cent. The average interest rate is 7.48 per cent. The Domar Gap, therefore, is a positive 7.48 per cent. Hence, according to Isaac, the debt is sustainable. The CAG did a more complicated arithmetic using intricate economic notions like ‘rate spread’ and ‘quantum spread’ and eventually concluded that the debt was sustainable.But here is why the Finance Minister still needs to be wary. The ratio of revenue deficit to fiscal deficit is all set to rise in a disproportionate manner from 48.77 percent in 2010-11 to 56.56 percent in 2011-12. A rocketing revenue deficit means that the revenue used up to pay off the state’s committed expenditures like interest burden is shooting up.Now, take into account the ratio of interest payments to revenue receipts (IP-RR). State-wise data put out by the RBI this year shows that 11 states were able to align their IP-RR ratios with the Twelfth Finance Commisison’s target of 15 per cent by 2009-10. Kerala, along with West Bengal, Punjab and Maharashtra, are not included.The state’s debt profile shows another disturbing sign. Provident fund, small savings, insurance and security deposits as a proportion of the total debt have dwindled alarmingly. If the rate of growth of the state debt has come down by nearly 2 per cent, from 12.17 per cent in 2009-10 to 10.37 per cent in 2010-11, the reason is the precipitous fall in small savings and provident fund.From Rs 21,296 crore in 2009-10, small savings and provident fund dropped to Rs 19,821 crore in 2010-11, a negative 6.93 per cent growth rate. This is the second time in ten years that small savings and provident fund recorded negative growth. (In 2006-07, there was a negative growth of 2.07 per cent). This means that small savings schemes like postal schemes are fast becoming unattractive and also that employees are taking money out of their provident fund to invest in high-earning avenues like the stock market.This ‘small savings and provident fund’ component in the debt profile is equivalent to high-density lipoprotein (HDL) cholesterol or good cholesterol in a person’s lipid profile. A dip in this account is undesirable. ‘’At a time when the Centre is putting curbs on the finances of the State, such funds offer the state greater freedom. By improving the quality of service and offering fair interest rates, the state could attract more such deposits which in turn can be used to boost capital expenditure,’’ Thomas Isaac says in his book ‘Keralam: Mannum Manushyanum’.
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