GOVERNMENT OF KERALA

MEDIUM TERM FISCAL POLICY &

STRATEGY STATEMENT
WITH MEDIUM TERM FISCAL PLAN
FOR

KERALA
2016-17 to 2018-19

FINANCE DEPARTMENT
2016

STATEMENT OF COMPLIANCE
This 2016-17 Medium Term Fiscal Policy and Strategy Statement is
placed before the Legislature in compliance with Section 3 of the
Kerala Fiscal Responsibility Act, 2003.

Section 3 of the Act requires the Medium Term Fiscal Policy

Statement to include the following elements all of which have been
incorporated in the document.
1. A statement of recent economic trends and prospects for
growth and development.
2. An assessment of sustainability relating to the revenue
deficit and the use of capital receipts for generating
productive assets.
3. An evaluation of the performance against targets for 201415 and 2015-16.
4. The medium term fiscal objectives of the Government.
5. Three year rolling targets for fiscal indicators with
specification of underlying assumptions.
6. The strategic priorities and key policies of the Government.
7. Policies of Government for the ensuing financial year
relating to taxation, expenditure, borrowings, other
liabilities etc.

FOREWORD
These are not the best of times for the world economy. Advanced economies are
trying hard to sustain growth and the emerging markets and economies are making efforts to
hold their own, riding on the strong backing of domestic demand. Even though the tremors
in the global economy does have its impact on the Indian economy, the Indian economy has
not yet suffered major setbacks. But agrarian distress, deceleration in industrial production
and widening income inequalities remain major sources of concern.
As brought out in the 'White Paper on State Finances, June 2016' the economy of the
state is facing stressful times. The finances of the State are extremely strained. Government
is finding it difficult to raise enough money (from the state's own revenue) for funding the
state's developmental/non-developmental activities and also facing difficulties in providing
welfare pensions, stipends and scholarships to its citizens.
The former Finance Minister had mentioned about the strained financial health of the
state in the MTFP presented along with the 2016-17 interim budget. When I presented the
white paper of state finances, a few days ago, I had explained the fiscal crisis that the State is
facing. The implementation of the 10th pay revision will further increase the revenue deficit
during this fiscal as well as in the coming two years. I had also outlined measures of a strategy
to emerge out of this situation. The approach lies in essentially strengthening the state's own
tax and non-tax revenue base and sustaining a growth rate of 20-25% and holding down
inessential and avoidable expenditure while using the States limited resources to leverage
more funds from the capital markets. I strongly believe that it will be possible to guide the
state into a positive growth trajectory.
It gives me great pleasure in presenting before you the Medium Term Fiscal Policy and
Strategy Statement 2016-17.

08.07.2016

Dr. T. M. Thomas Isaac

Minister for Finance and Coir

MEDIUM TERM FISCAL POLICY AND STRATEGY

STATEMENT WITH MEDIUM TERM FISCAL PLAN FOR KERALA
OVERVIEW
The world economy is not showing a rosy picture.

Fiscal growth has dampened

considerably. Advanced economies, especially the US economy could not achieve the expected
targets in the last financial year. Although some emerging markets and developing economies
have been trying to achieve macroeconomic stability, they are confronted with many challenges
like price slump of commodities, geopolitical issues and rigid financial conditions among others,
that prevent their economies from bouncing back. A recent uptick of the commodity prices has,
to an extent, show some positive movement in the economies and helped them to buck the
tailspin. However, the Indian economy, relative to other large economies of the world has been
categorized globally as one with a positive outlook on growth.

RECENT TRENDS IN MACROECONOMIC DEVELOPMENT:

IN THE GLOBAL ECONOMY
2. The world economy can well be likened to a big ocean. Any tremor that is formed in
one part, will be felt everywhere, with varying intensities. India in general and Kerala in particular
is not an exception to this phenomenon. Global growth and inflation have not yet attained
sustainable long term equilibrium levels. According to the projections made by the World Bank,
growth of the global economy in 2016 is around 2.4%, down by 0.5% from the January projection.
3. The performance of the US economy was moderate during the previous year. In
December 2015, the Federal Reserve raised the interest rate to quarter point and initiated the
normal policy rate and also hinted for a further hike. The reversal of impact which happened in
the later stages proved that the December 2015 Fed Rate hike was unwanted. The Fed Rate hike
not only affected the US economy, but its repercussions were felt all around the world. The
inflation caused by the Fed Rate hike, adversely affected the growth of the US economy which
was already suffering from a lower wage rate growth.

Due to all the above mentioned

consequences, it is believed that there would not be another Fed Rate hike in the near future.

Page | 1

4. The Fed Rate hike also had an adverse impact on the Chinese economy. The Chinese
economy started to weaken further as a result of the hike in Fed Rate and its growth is still
declining. The growth rate during the first quarter of 2016 was 6.7%, as against the 6.9% in 2015.
The main reason for the current situation of the Chinese economy is the setback suffered from
creating a large overcapacity in the infrastructure sector and the manufacturing sector. The
Chinese authorities are taking suitable corrective steps by cutting down the excess capacity and
as a direct consequence, their demand for commodities (from the international market) would
decline further. This fall in demand would be a further setback for the global commodity prices.
Even though all the above mentioned factors are manifesting in a decline in the growth of the
global economy, fortunately they have not yet caused any undue damage in the global economy's
growth. Fears of a 2008 like global financial crisis will become real only if a major economy like
that of the Chinese, suffer from a severe economic meltdown over a longer period of time.
5. Over the last 2 years, the sharp decline in oil prices has caused a decline in the resilience
and growth rate of the oil exporting Middle East countries. Although, at present, there is a slight
improvement in the oil prices, as long as the wide gap between the supply and demand of oil
remains unbridled, the oil price stability is still a long way off.
6. On the 23rd of June 2016, majority of the UK citizens voted against the continuance of
the Great Britain in the European Union. This decision by the British to exit the European Union
has gained worldwide attention and is popularly termed as 'Brexit'. In the days following this
historic event, ripples of varying intensities have started surfacing in several economies all over
the world. The immediate future of the British economy remains vulnerable at least in the short
term future. The British Pound has already suffered a significant setback. Only time will tell the
actual intensity of the consequences which Brexit will inflict upon the economy of the United
Kingdom, the European Union and the world as a whole.
7. The dampened demand for commodities in the global market has led to the exit of
money out of risky assets to safer securities and stronger currencies. This global trend is putting
a high pressure on the Indian currency and equity markets. In 2012, if the value of the Indian
Rupee against the US dollar was 49, the value was 67 on 30/05/2016. This drives home the
strength of the US dollar.

Page | 2

AT NATIONAL LEVEL
8. India has performed relatively better in the current turbulent global economic scenario,
even though as the Governor of the Reserve Bank mentioned, it could be more a situation of the
one-eyed person in the land of the blind. Sharp reduction in crude oil prices, strong domestic
consumption, moderate overall inflation, narrow current account deficit and controlled fiscal
deficit - all these factors are responsible for this optimism attached to the growth potential of
India. This also helped India to reduce its macroeconomic vulnerabilities. However, a serious
rethink on expenditure on the poor and the marginalized in our country has become necessary.
In many areas of social sector spending, outlays for this most deserving section of society has
suffered a discernible setback as a result of some thoughtless expenditure controls.
9. As per the advance estimate of the CSO, the GDP growth rate was 7.6% in 2015-16
compared to the 7.2% in 2014-15. According to the economic survey 2016-17, India is expected
to achieve more than 8% growth rate but due to the dominance of several factors like slow global
growth, financial market volatility and geopolitical issues in the world around us, it will not be an
easy task to achieve the growth targets of 2016-17.
10. Recently, the consumer price in India has increased to 5.76%, the highest since August
2014. In February 2015, the Government of India and the RBI agreed to set a consumer inflation
target of 4% plus or minus 2%. Journey from the 3.69% in July 2015 to the 5.76% in May 2016
was highly volatile. The resurgence of commodity prices and the price hike of non-seasonal food
items are considered to be the major factors responsible for an increase in inflation beyond the
predicted levels. Even despite the uncertainty regarding inflation, the RBI is maintaining the reporate unchanged at 6.5% (the lowest in 5 years) but with a caution to expect an accommodative
stance if necessary. A high domestic demand strengthened by the expected normal monsoon
and the implementation of the seventh pay revision will further add to inflationary pressures.
11. Although the improved market conditions are helping to bring in strong capital inflows,
over the past few years the Indian currency has been under severe pressure. Even though the
market value of the Indian Rupee against the US Dollar has been declining over the past few years,
when the Indian currency is compared with its peers, its performance has been better. This can
be attributed to the favourable perception around the macroeconomic resilience.

Page | 3

12. Agrarian distress is on the rise. Increased market interventions on account of

globalization, liberalization and privatization has been disruptive in many parts of the country, in
particular, to the small, marginal farmers and agricultural labourers. Often it has manifested in
rise of indebtedness across households of this section. In extreme cases, this phenomenon has
resulted in human calamities sometimes culminating in farmer suicides.
13. Industrial stagnation which has gripped India has not yet responded to current policy
interventions of the Union Government. Data released by the Ministry of Statistics and Plan
Implementation on the Index of Industrial Production (IIP) reveals that year-on-year growth rate
in 2015-16 stagnated at 2.4% in comparison with the growth rates of as high as 15.5% in
2007-08.
14. Yet another other vexing dimension of economic growth in India is the growing rise in
inequality both rural and urban.

While consumption based inequality, (which generally

understates income based inequality) is the generally used measure, Gini Coefficient from
available data (UNDP data and available Planning Commission figures) suggests that inequality
has worsened from the level of 0.30 and is now in the range of 0.35-0.40 in the last decade. These
no doubt, have policy implications for regional planning and fiscal management at the State level.
15. Over the last 14 months, Indian exports have been declining due to falling global
demand. The continuously declining export poses a serious threat to the current account deficit
but due to the falling crude oil prices, the net effects are not that obvious. If the oil price
increases, then the current account deficit can be maintained at a sustainable level only if the
export is increased. Uncertain global demand due to sluggish growth compel India to explore
new markets or develop new products for the existing markets, so as to improve the export sector.
16. Although India has relatively stronger fundamentals, foreign investors remain wary of
pumping in more capital into the Indian market. Recently, the Government of India has taken
steps to amend the Consolidated FDI policy and has made it more liberal to encourage a higher
participation of foreign investors in the Indian economy. This policy will have significant
detrimental effect at least in some vital sectors of the economy like pharmaceuticals and will have
long term ramifications in sectors like defense, insurance and retail.

Page | 4

STATES ECONOMY
17. Although the recommendations of the 14th Finance Commission enabled the state to
receive a higher share of devolution of central tax and a sufficiently big dose of revenue deficit
grant in 2015-16, the state treasury was plagued by several liabilities like unsettled claims of work
bills, welfare pension arrears, scholarships and stipends, etc. Due to the state's tax and non-tax
revenue collection system being ineffective, the share of central tax and the revenue deficit grant
which are received during the initial days of every month, are generally being used for settling
the committed expenditures like salaries, wages, pensions etc.
18. The major problem faced by the Kerala economy today, is the decline in tax/non-tax
revenue. For years, the Kerala government has been adopting the policy of giving preference to
social infrastructure over industrial growth and physical infrastructure. This policy accounts for
the relatively higher human development index that the state enjoys. High rate of remittance
and agricultural returns have always supported the growth of our economy, but they are always
negatively affected by external vulnerabilities. As per the latest SLBC report, in March 2016, the
state's agricultural credit suffered a negative growth and this points to the inactivity in the
agricultural sector. During March 2016, the growth in domestic deposit was also showing a
declining trend (3% decline) compared to that during March 2015. The agricultural loan advance
which had a growth rate of 1% in March 2015, declined to negative 2.75% in March 2016. In
March 2015, the NRI growth rate had shown a fall in growth (growth rate of 16%) when compared
to that during March 2014 (growth rate of 41%). In March 2016, compared to last year's, a growth
of 23% was seen in NRI deposits. The declining growth of domestic deposit can be considered as
one of the direct consequences of inflation.
19. The growth characteristics of states own tax and non-tax revenues for the period from
2009-10 to 2015-16 are presented in the table below. The states non tax revenue recorded a
sharp increase in 2011-12 and 2012-13 and then decelerated mildly. On the other hand SOTR
which had exhibited a robust growth until the second half of 2012-13, sharply collapsed
thereafter and has stagnated at a considerably lower level.

Page | 5

SOTR & NTR Over the Years

SOTR
Growth (SOTR)
Non Tax Revenue
Growth Rate (NTR)

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

2015-16

17625

21722

25719

30077

31995

35233

39882

10.22

23.25

18.40

16.95

6.38

10.12

13.19

1852

1931

2592

4199

5575

7284

8911

18.79

4.25

34.24

61.97

32.79

30.65

22.34

SOTR-NTR
45000

70.00

40000

60.00

35000
50.00

30000
25000

40.00

20000

30.00

15000

20.00

10000
10.00

5000
0

0.00
2009-10
SOTR

2010-11

2011-12

Non Tax Revenue

2012-13

2013-14

Growth (SOTR)

2014-15

2015-16

Growth Rate (NTR)

20. The table below shows growth characteristics of revenue receipts and revenue
expenditure. The state's revenue expenditure has been showing a continuous uptrend, except in
2015-16. The decline in growth during 2015-16 was due to postponing various expenses (both
capital and revenue) to the following year, so as to prevent the state from collapse under the
financial crisis.

Effective and prudent financial management, through rationalisation of

expenditure and revenue mobilisation, has become imperative.

Page | 6

Components of Revenue Expenditure

2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16
31132
34665
46045
53489
60486
71746
81834
11335
12176
15022
20160
22969
29313
34611
5292
5690
6294
7205
8265
9770
10861
9799
11032
16029
17257
19280
21411
23236
4706
5767
8700
8867
9971
11253
13126
441
624
1002
1265
1252
1248
1232
2083
2971
3897
4739
5926
6398
6493
8812
8581
10123
14156
15791
21668
26886

Revenue Expenditure
Non SPI Revenue Expenditure
Interest
Salaries
Pensions
Subsidies
Devolution to LSGs
Other Revenue Expenditure

Revenue Expenditure - Major

Components
30000
25000
20000
15000
10000
5000
0
2009-10
Interest

2010-11

2011-12

2012-13

2013-14

2014-15

Salaries

Pensions

Subsidies

Devolution to LSGs

2015-16
Others

21. The table below shows trend in revenue receipt and its share in GSDP. A sharp decline
is visible in the revenue receipt in 2012-14, due to the fall in the rate of Growth in SOTR and Non
Tax revenue during these periods, are shown in the table. Government of India, in 2014-15,
decided to route all central transfers through the state exchequer. This, along with the hike in
share of Central Taxes and Revenue Deficit Grant, has helped in increasing the revenue receipt.

Revenue Receipts-GSDP
Revenue Receipts
GSDP
RR/GSDP (%)

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

2015-16

26109

31018

38063

44138

49177

57951

71020

232381

286834

364048

412313

462916

519896

585467

11.24

10.81

10.46

10.70

10.62

11.15

12.13

22. The issues of both fiscal and physical constraints that are being faced by the Kerala
economy and the public exchequer, to be addressed immediately are:
The State has lost out on the premium earned by financially well managed states for Open
Market Borrowings.
Page | 7

 Lack of investment in significant infrastructure projects.

The State lost out on achieving incentives mentioned in award of 14th Finance
Commission for good management.
Revenue Deficit Grants for Kerala in the award of 14th Finance Commission to be stopped
from 2018-19 onwards thus putting enormous burden on State Exchequer.
Increased devolution of funds to Local Bodies as per award of State Finance Commission
will put further load on State Finances.
Arrears on account of recent Pay Revision are to be paid in four installments in 2017-18
and 2018-19. This will also put further strain on our budget.
Huge outflow to the tune of Rs.1025 to 1375 cr. per month are needed in the next five
years to service past debt liabilities.
Heavy dose of capital expenditure (CAPEX) needed to bridge infrastructure deficit
implying that State needs to invest 4% of GSDP on capital works.
Decline in rubber and other commercial crops has affected Kerala GSDP growth.
23. In Budget 2016-17, Government of India announced an FRBM committee for making
necessary amendments to the FRBM Act 2003 to review the working of the FRBM Act over the
last 12 years and to suggest the way forward, to look into the various factors and considerations
going into determining the FRBM targets to examine the need and feasibility of having a 'fiscal
deficit range' as the target in place of the existing fixed numbers (percentage of GDP) as fiscal
deficit target and to examine the need and feasibility of aligning the fiscal expansion or
contraction with 'credit contraction or expansion' respectively, in the economy.
24. If necessary amendments are made based on the above mentioned terms of
reference, the state will get additional fiscal space to finance its development expenditure. On
bringing the inverse link between the monetary and the fiscal dimensions of the economy under
the consideration of the FRBM Act, the necessary money circulation important for economic
growth can be achieved and this will help in preventing economic deceleration. These changes
will very much help our state which has been trying to mobilise additional resources, in financing
the major infrastructural projects of the state.

Page | 8

Fiscal Performance in 2014-15

25. In 2014-15, the total expenditure projected as per the budget estimate was
Rs.79414.01 cr. The source for meeting the expenditure was budgeted as Rs.65015.53 cr. from
receipts (other than borrowings) and Rs.14543.02 cr. from borrowings (including public debt). By
way of receipts (other than borrowings) and other liabilities, the state was able to collect only
Rs.58102.39 cr., i.e. 89% of the projected. Due to the sluggish growth in the service sector and
the TDS category, the central government was able to collect only 86% of the projected figure.
This has resulted in a drastic decline in the share of central tax to the state government, which in
turn has caused an increase in the borrowing by nearly Rs.5000 cr., adding to the mounting debt.
To fill the gap, the state had to depend more on public debt.
26. Electronic Ledger Accounting System (eLAMS) was developed to control the crediting
of funds to the TSB account, towards the end of the financial year. For the actual utilisation of
funds, the first half of the following financial year was also allowed to be made use of. This move
by the Finance department helped to control the transfer of credits to the TSB account, just for
the sake of accounting the expenditure, towards the end of the financial year. By controlling the
unnecessary transfer of credits to the TSB account, the total expenditure was able to be
maintained within the budgeted figure. The fact that our capital expenditure accounts for only
6.5% of the total expenditure and 1.1% of our GSDP, points to the unfortunate reality that basic
infrastructural development of the state has not received the rightful emphasis it merits. The
developmental activities of the state are not getting sufficient space due to the committed
expenditure utilising around 73.22% of the state's total receipts. This problem highlights the need
for effective expenditure rationalisation and prudent financial management.
27. Even though the projected revenue mobilisation was not achieved, the central
transfers routed through State Exchequer provided a cushion to the liquidity of the state. A
significant sum, largely of plan expenditure for the year was rolled into the next fiscal 2015-16 by
making a corresponding entry in the electronic ledger. The assumption was that this entry would
serve as a claim for that department to seek the same by way of additional authorization. This
made the Revenue deficit (RD) for 2014-15 lower than what it would have been otherwise.
However, the actual Revenue Deficit at Rs. 13795.96 cr. for 2014-15 is nearly double the budget
estimate of Rs.7131.69 cr. for that year and far exceeds even the Revised Estimates of
Page | 9

Rs.10263.97 cr. The revenue deficit and the fiscal deficit are 3.06% and 4.13% of GSDP
respectively. These are far above the target fixed by the 13th Finance Commission.

Fiscal Indicators
Revenue Deficit/Surplus
Fiscal Deficit/Surplus
Primary Deficit/Surplus

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

2015-16

5022.98

3646.50

7981.62

9351.04

11308.56

13795.96

10814.49

7871.62

7703.66

12762.08

15002.06

16944.12

18641.73

17715.07

2579.14

2013.66

6468.48

7797.25

8678.74

8872.14

6853.82

Fiscal Indicators
20000.00
18000.00
16000.00
14000.00
12000.00
10000.00
8000.00
6000.00
4000.00
2000.00
0.00
2009-10

2010-11

2011-12

Revenue Deficit/Surplus

2012-13

2013-14

Fiscal Deficit/Surplus

2014-15

2015-16

Primary Deficit/Surplus

Fiscal Deficit: 13th FC Road Map Vs Actuals

Financial Year
FC Recommended
Actual

2011-12

13th FC
2012-13
2013-14

2014-15

3.50

3.50

3.00

3.00

3.76

3.64

3.66

3.59

Fiscal Deficit : 13th FC Road Map Vs Actuals

4.00
3.50
3.00
2.50
2.00
1.50
1.00
FC Recommended

0.50

Actual

0.00
2011-12

2012-13

2013-14

2014-15

2015-16

Page | 10

Review of MTFP 2015

28. In 2015-16, Kerala's own-tax revenue was projected to grow by 18.65% more than the
revised estimate of 2014-15. After the continuous deceleration over the last 3 to 4 years, a slight
improvement in tax collection was visible during the 2014-15 financial year, though it was
nowhere near the budget estimates. The improvement in tax collection during the 2014-15 fiscal,
influenced the growth projection to be hiked to 18.65% but as per the AG's pre-actual figures,
only around 10% growth in SOTR was achieved. The decline in the growth of the state's
agricultural sector, falling commodity prices, sluggishness in the real estate sector, inflation and
above all, the deep rooted corruption prevalent in our system, are all considered to be the major
factors responsible for dragging the tax collection growth.
29. The growth of Kerala's non-tax revenue has always been uneven. The revenues from
mining, forestry, dividend from PSUs, administrative services, social services, etc are very low.
Due to an increase in the devolution obtained from the central government (based on the
recommendations of the 14th Finance Commission), changes have been made in the funding
pattern of several centrally sponsored schemes and there has been a drastic decrease in the total
grant received from the central government. This put some pressure on the state economy during
2015-16.
30. On the expenditure side, unlike the previous years, a healthy growth is visible in the
capital expenditure. The funding for the state's mega projects is the main reason behind such an
increase in the capital expenditure. However, the figure on capital expenditure has to accepted
with reservation as it does include a sizable amount still held in the Treasury and has not been
actually expended.

Page | 11

STATE GOVERNMENT ACCOUNTS - MEDIUM TERM (Rs. In cr.)

Sl.
No

Items

Budget
Estimate

Budget
Estimate

Accounts

Revised
Estimate

% of Actuals to
Budget Estimate

2014-15

2015-16

2014-15

2015-16

2014-15

2015-16

Revenue Receipts (2+3)

64842.34

77427.20 57950.47

71019.72

89.37

91.72

Tax Revenue(I+II)

51832.85

58549.80 43158.79

53003.41

83.27

90.53

(I)State's Own Tax Revenue of which

42467.49

45428.03 35232.50

39881.65

82.96

87.79

2659.02

3039.52

71.22

70.50

34712.28 27908.33
2600.66 1777.42

31193.19

87.45

89.86

2086.29

55.40

80.22

Stamps & Registration

Taxes on sale and purchase including VAT

3733.67
31913.47

4311.33

State Excise Duty

3208.36

Taxes on Motor Vehicles

2799.82

3087.35

2364.95

2837.34

84.47

91.90

(II)Share of Central Taxes

9365.36

13121.77

7926.29

13121.77

84.63

100.00

18877.40 14791.68

18016.30

113.70

95.44

State's Non Tax Revenue(I+II)

13009.49

(I)State's Own Non-Tax Revenue

6337.47

8931.12

7283.69

8911.02

114.93

99.77

(II) Grants from the Centre

6672.02

9946.28

7507.99

9105.28

112.53

91.54

Non Debt Capital Receipts(I+II)

173.19

198.32

151.92

224.89

87.72

113.40

(I) Recovery of Loans

148.16

172.30

123.74

194.83

83.52

113.08

25.03

26.02

28.18

30.06

112.58

115.53

(ii) Other Receipts

Borrowings and other liabilities including
public account (net)

14543.02

17716.55 18567.23

17615.43

127.67

99.43

Total Receipts (1+4+5)

79558.55

95342.07 76669.63

88860.05

96.37

93.20

Non Plan Expenditure (I+II+III)

62616.74

73754.45 62337.41

71093.78

99.55

96.39

(I) On Revenue Account

60946.51

70449.80 61463.85

69569.71

100.85

98.75

a. Of which Interest Payments

9598.15

10952.10

9769.59

10861.24

101.79

99.17

(II) On Capital Account

1304.89

2900.74

374.05

1098.60

28.67

37.87

365.34

403.91

499.51

425.47

136.72

105.34

(III) Loan Disbursements

8

Plan Expenditure (I+II)

16797.27

21570.32 14406.71

17865.90

85.77

82.83

(I) On Revenue Account

11027.53

14809.32 10282.59

12264.49

93.24

82.82

(II)On Capital Account

5331.49

6319.42

3880.54

5107.60

72.79

80.82

438.25

441.58

243.58

493.80

55.58

111.83

79414.01

95324.77 76744.12

88959.68

96.64

93.32

14398.48

17699.25 18641.73

17715.07

129.47

100.09

11 Revenue Surplus (-)/Deficit (+) ([7(I)+8(I)-I]

7131.70

7831.92 13795.96

10814.49

193.45

138.08

12 Primary Surplus (-)/ Deficit (+) [13-7(I)a]

4800.33

6747.15

6853.82

184.82

101.58

(III) Loan Disbursements

9

Total Expenditure (7+8)

10 Fiscal Surplus (-)/Deficit (+) [9-(1+4)]

8872.14

Page | 12

Targets and Policies

Strategic priorities
31. The task before us is challenging. The strategic priority before the government is to
rationalise the expenditure without compromising on the committed expenditure particularly for
the poor and the marginalised and to reduce the gap between the share of capital and revenue
expenditure in the total expenditure. We have to promote growth and stability by increasing
outlays on infrastructure, even within the available narrow fiscal space, without compromising
on the fiscal consolidation path. The need of the hour is to focus on these priority issues viz:
(i) to enhance the tax and non-tax revenue collections,
(ii) to reduce infructuous expenditure and
(iii) to encourage capital investment in core developmental schemes.

One of the key agendas of the new government is to bring about a comprehensive review
of the existing tax framework by improving the existing revenue collection system and
thereby achieve the tax base that was present 5 years ago. The government will be
adopting a more vigorous approach in the collection of taxes, non-tax revenue and
arrears. Galvanization of tax machinery particularly Commercial taxes, Motor Vehicles,
Registration, Revenue and Excise will be effectively done. Immediate steps will be
initiated to bring down cases of stay from various Courts and Tribunals. It has to be
ensured that growth rates in tax collection are sustained at 25% per annum for next five
years.

Regarding expenditure, the policy will be to review the efficiency of the expenditure
programme and to improve the service delivery by cutting down on expenditure,
wherever possible. There will be exercise of strict control over Non Plan Revenue
Expenditure minus Salaries Interest and Pension (SIP).

SIP will be moderated at

reasonable and sustainable levels.

Stepping up CAPEX to boost and provide impetus to the economy. Mobilizing resources
through various financial and infrastructural institutions for taking up and completing
major capital projects. Wherever necessary, special purpose vehicles (SPVs) will be
created to implement major capital projects in the State.
Page | 13

To reduce the debt service level, the government is planning to implement a more
aggressive debt management policy.

The government is planning to explore the possibilities of seeking long term loans from
external agencies and raising funds through project specific SPVs to finance the major
public sector infrastructural projects, without causing undue stress to the state's budget.

Enhance the extent of land under paddy cultivation to three lakh hectares and for this will
also adopt measures like upland paddy cultivation and cultivation in fallow lands. Expand
the area of vegetable farming to 50,000 hectares.

The State intents to increase infrastructure investment by increasing capital expenditure.

Mega infrastructure projects working in progress will be completed in time and new ones
will be taken up.

Congenial environment shall be made for private investment into the state. Modernised
road systems, rapid railway lines, efficient inland navigation, vibrant air and seaports,
industrial parks, assured supply of quality power shall be created through leveraging
adequate funds outside the budget by participating private players.

The goal of the Government will be to propel the State towards economic development
and competitiveness. For that massive investment shall be made for infrastructure with
the active participation of private investors.

A new financial management system that will integrate the financial, payroll, pension and
personnel databases of Treasuries and Finance Departments linked to the related IT
systems in the office of the Accountant General, to become the first State to develop such
a comprehensive information system. The Treasury Network will be developed to have its
own Core Banking System in the next six months. Liquidity management will be improved
to a high degree of sophistication with intelligent forecasting tools built in. These tools no
doubt will come to our aid in extricating the State out of the terrible financial mess that it
is in now.

Page | 14

DEBT MANAGEMENT AND SUSTAINABILITY

32. Debt sustainability is defined as the ability of a country to meet its debt obligations
without requiring debt relief or accumulating arrears. It is the only fiscal indicator which is fully
within the prescribed prudential fiscal targets for the State Government. Debt/GSDP in 2014-15
is 26.05%. Debt/Revenue Receipt has come down from 233.72% in 2014-15 to 216.92% in RE
2015-16, which is well below the benchmark level of 300%. As per the accounts of the Accountant
General, Kerala's outstanding debt in 2014-15 was Rs 1,35,440 cr. and based on the revised
estimate, this is expected to increase to Rs. 1,54,047 cr. in 2015-16. The increase in public debt
during 2014-15 was Rs 12,666 cr. During 2012-13 and 2013-14, major portion of the state's public
debt (around 90 -95%) was used for financing the revenue deficit and hence there was a lack of
funds for financing the capital expenditure. For financing the capital expenditure, funds from the
public account were utilised. As alluded to elsewhere, this points to the fundamental financial
instability of the state. Such a high public debt is mainly due to the continuous fiscal deficits. The
interest payment, as a percentage of total revenue receipts and revenue expenditure, is now in
the range of 12-17%. Being prudential in Debt Management State is mainly opting for Market
Borrowing, which is comparatively cheaper, to finance the fiscal deficit.

Projections for the Budget Estimate 2016-17

Revenue Receipts
33. The strategic priority of the Government is to enhance the tax and non tax revenue,
through strict enforcement of the legal provisions. Therefore, in the revised budget estimate
2016-17, the SOTR is projected to grow @ 19.38% more than the revised estimate 2015-16. Since
the State Budget 2016-17 (by previous Government) was presented before the union budget
2016-17, share of the central tax was projected to grow at 13% but as per the Union Budget
Estimate, the states share of central tax was Rs.14282 cr., i.e. Rs.545.75 cr. less than the
projected. Thus, the incremental SOTR projected was offset by the decrease in the tax devolution
and the net effect was only Rs.24.25 cr. Sales Tax/VAT and Land revenue, the major components
of the state's own tax revenue, are projected to grow at 20% and 25% respectively. For the past
few years, the growth trend of the above components had been less than 15%. The receipts from
miscellaneous general service, coming under non tax revenue, of which the major component is
receipts from lotteries, was estimated to grow at 21.87% over the revised estimate of 2015-16.
Page | 15

In the revised budget estimate of 2016-17, it is expected

to grow at 32.42%, keeping other

components in the original budget as such. Since the government intends to mobilize the savings
of the public to the Treasury Account (which is a cheaper way of financing of fiscal deficit),
accretion to the public account (net) is estimated to grow at 64%.

Expenditure
34. The policy of the Government is to boost up agriculture growth, strengthen social
security coverage and to disburse pension and other retirement benefits without interruption.
With this end in view, the expenditure under the above sectors are estimated at a higher rate and
the total expenditure is estimated to grow by 21.39% which is 6.55% above the original budget
estimate 2016-17. An increase in Capital expenditure was already incorporated in the budget
estimate 2016-17. Due to the increase in total expenditure, consisting of revenue expenditure,
without a commensurate increase in revenue receipt, the revenue as well as fiscal deficit is
estimated to grow to Rs.13066.25 Cr. more than the RE 2015-16. Revenue Deficit and fiscal
deficit, as a percentage of GSDP, is estimated to grow at 1.98% and 3.51% respectively. The size
of the state plan and Plan expenditure is estimated to remain as in the Budget Estimate 2016-17.

FISCAL OUTLOOK FOR 2017-18 TO 2018-19:

Three Year Rolling Targets and Underlying Assumptions
35. The Kerala Fiscal Responsibility (Amendment) Act, 2011, based on the revised fiscal
consolidation road map set out by the 13th Finance Commission, had mandated the state to
achieve the fiscal indicators of RD/GSDP at zero, maintain FD/GSDP at 3 percent and bring down
Debt/GSDP to 29.80 percent in 2014-15. The 14th Finance Commission, while keeping status quo
in RD/GSDP and FD/GSDP targets, has recommended to bring down the Debt/GSDP ratio to 29.67
percent by 2019-20.
Indicators
RD/GSDP
FD/GSDP
Debt/GSDP
IP/RR

2015-16

Fiscal Rules Proposed by 14th FC

2016-17
2017-18
2018-19

2019-20

0.00

0.00

0.00

0.00

0.00

3.00
31.34
15.70

3.00
30.84
15.01

3.00
30.40
14.37

3.00
30.01
13.78

3.00
29.67
13.23

Page | 16

36. Though, the recommendations of the 14th Finance Commission has already been
approved by the Central Government, the state is yet to make subsequent amendments in the
KFR Act 2003. Even then, the state has to comply with the fiscal consolidation targets put forward
by the Commission. The state was well within the target regarding Debt/GSDP, at 26.05 percent
in 2014-15 and the target is achievable during the forward estimates period too but with respect
to RD/GSDP and FD/GSDP, the targets proposed remained unachievable due to the overrun of
non-plan revenue expenditure. During the forward estimates period, implementation of the
much awaited Goods and Services Tax (GST) and the consequent resurgence in tax mobilization
should considerably bring down the revenue deficit close to the targets. Projections for the
forward estimates period are thus made considering this prospect to be achieved.

The

underlying assumptions on which projections are made are given below.

Gross State Domestic Product

37. Government of India adopted the method of calculating GDP at market prices shifting
the base year from 2004-05 to 2011-12, for determining all fiscal indicators during 2014-15. State
has adhered to this globalized trend of estimating GDP at market prices in arriving GSDP.

GSDP at
market price
(Rs. In cr.)
% growth of
GSDP

2011-12

2012-13

2013-14

364047.87

412313.00

462916.06

13.26

12.27

2014-15
519895.85

12.31

2015-16

2016-17

585467.22

659308.72

12.6124

12.6124

38. Though a sudden shifting of base year has inflicted difficulties in identifying GSDP
growth rates for Kerala due to the implicit deflator following an inexplicable growth rate pattern,
GSDP has been projected at an average growth rate of 12.6124% for 2016-17. The forward
estimates of GSDP are arrived accordingly with a rounded growth rate of 13%.

Revenue Receipts
States Own Tax Revenue
39. The main agenda before the Government is to tap the tax potential of the State in full.
The State cannot sit in the sanguine hope that tax revenue will be buoyant on its own. Deliberate
and well planned and articulated resource mobilisation strategy has to be devised. In fact, the
Page | 17

survival of the State itself as a viable economic and financial entity depends much on the
commitment with which we pursue our revenue mobilisation targets.
40. The SOTR has been projected to grow at an annual rate of 22% in view of the States
earnest initiatives to revive the considerably decimated growth in revenue collection and the
much awaited introduction of GST in the forthcoming year.

Non-tax Revenues
41. State's Own Non Tax Revenue shows a reliable growth over the past few years. Hence,
an optimistic CAGR of 31.50% for the period 2010-15 is applied for forward estimates.

Resources from Center

42. Taking into account of the possible implementation of GST, a CAGR of 18.40% over
2010-15 is applied for forward estimate periods.

Borrowings: Public Debt and Other Liabilities

43. From 2013-14, State is mandated to limit its borrowings to a 3 percent of GSDP. Hence,
this level has to be maintained for the forward projections.

Revenue Expenditure
Salaries
44. The revised pay and allowances recommended by the 10th Pay Revision Commission
was implemented with effect from 01.07.2014. The arrears on account of pay revision will have
to be disbursed in four instalments, each at 25% of the arrears with interest, in cash on 1.4.2017,
1.10.2017, 1.4.2018 and 1.10.2018 respectively along with interest as per G.O (P) No. 07/2016/Fin
dated 20.01.2016. This liability has been accounted in the forward estimates. The basic pay
component has been projected at 2.5% incremental rate. Dearness Allowance is projected by
taking inflation at current level. The allowances are projected to grow at the current level.

Pension
45. For the Forward Estimates period, pension is projected to grow at 10 percent. The
arrears on account of pension revision will have to be disbursed in four instalments, each at 25%
of the arrears, in cash on 1.4.2017, 1.10.2017, 1.4.2018 and 1.10.2018 respectively along with
interest as per G.O (P) No. 09/2016/Fin dated 20.01.2016.
Page | 18

Interest
46. Effective rate of interest is taken as 7.68 percent for forward estimates. Effective
interest rate is applied on the midyear outstanding debt stock to arrive at the interest payable.

Devolution to LSGIs and Subsidies

47. The recommendations of the 5th State Finance Commission are yet to be accepted by
Government, hence devolution to LSGIs are calculated on the basis of a CAGR of 25.16% over the
past five years. Subsidies are projected with a CAGR of 23.13% for the forward estimates.

Capital Expenditure
48. State has been mandated to eliminate revenue deficit by 2014-15. But the revenue
expenditure, major portion of which is of committed nature, cannot be curtailed beyond certain
extent. In the hope of GST implementation and the effective revenue mobilisation programmes
by various tax collecting departments, it is expected that the revenue deficit will be brought under
control. Accordingly, the borrowings and surplus in the revenue account can be utilized for capital
expenditure. Even so, in order to reinvigorate the economy, more funds have to be aggressively
infused into our much needed infrastructure projects. To this end, the State intends to selected
PSUs and financial institutions of the State to raise resources by making necessary changes in the
legal frame works of existing financial institutions. At the same time, all other capital projects
have to be funded through the State Budget. This implies that enough provisions have to be
allocated in the State budget towards capital expenditure during the forward estimates period.
Growth rates of 24% and 22% are applied for 2017-18 and 2018-19 respectively keeping in mind
the need for limiting overall deficit financing within the prescribed 3% of GSDP constraint.
However, the effective public investment growth rate of capex in the State is expected to be well
over 100% each year in view of the significant investments through project specific SPVs and new
financing structures that are planned.

Page | 19

OUTCOMES IN MAJOR INDICATORS IN 2017-18 AND 2018-19

49. The MTFP forward estimates for 2017-18 and 2018-19 are more proximate to the
targets proposed by 14th Finance Commission for these years. Expected FD/GSDP and IP/RR
targets would have been achieved towards the end of this period as per the projections and the
Debt/GSDP ratio would have been contained within the limits, but the other fiscal parameter
targets viz. on RD/GSDP, the State would have to cover more ground to reach the goal.

Indicators

MTFP Targets
2015-16 RE

2016-17 BE

2017-18

2018-19

RD/GSDP

1.85

1.98

1.62

1.18

FD/GSDP

3.02

3.51

3.30

3.00

Debt/GSDP

26.31

26.82

26.74

26.66

IP/RR

15.29

14.93

13.97

12.86

Page | 20

Medium Term Fiscal Plan 2016-17

Item
Revenue Receipts (A)
State's own tax revenue

2012-13

2013-14

2014-15

2015-16

2016-17

2017-18

2018-19

Accounts

Accounts

Accounts

RE

BE

44138

49177

57950

71020

84617

103390

126463

Forward Estimates

30077

31995

35233

39882

47614

58089

70868

Non Tax Revenue

4199

5575

7284

8911

11360

14938

19644

Resources from Centre

9862

11607

15434

22227

25644

30363

35951

53489

60486

71746

81834

97683

115435

136413

Revenue Expenditure (B)

Interest

7205

8265

9770

10861

12630

14439

16268

Salaries

17257

19280

21411

23236

27742

33718

35425

Pensions

8867

9971

11253

13126

15503

20521

25484

20160

22969

29313

34611

41808

46757

59236

Subsidies

1265

1252

1248

1232

1808

2226

2741

Devolution to LSGs

4739

5926

6398

6493

7379

9236

11560

14156

15791

21668

26886

32621

35296

44936

-9351

-11309

-13796

-10814

-13066

-12045

-9950

Non SIP Rev Expenditure

Other Revenue Expenditure

Revenue Surplus/Deficit (A)-(B)

Capital Expenditure (C)

5739

5759

4998

7125

10314

12819

15586

Capital Outlay

4603

4294

4255

6206

9573

12103

14893

Loan disbursements(net)

1136

1464

743

919

741

716

693

88

123

152

225

240

268

299

Non Debt Capital Receipts (D)

Fiscal Deficit/Surplus (A)-(B)-(C)+(D)

-15002

-16944

-18642

-17715

-23140

-24597

-25237

Primary Fiscal Deficit/Surplus

-7797

-8679

-8872

-6854

-10510

-10157

-8969

End of the period Debt

96490

111285

127225

144749

165448

188014

211817

7205

8265

9770

10861

12630

14297

16125

Debt Service

Salary + Interest+ Pension (SIP)

33329

37516

42433

47223

55875

68678

77177

Debt Stock

103561

119009

135440

154057

176839

199189

224445

9100

9763

11127

12417

Interest/Revenue Receipts (%)

16.32

16.81

16.86

15.29

14.93

13.97

12.86

Debt/Revenue (%)

234.63

242.00

233.72

216.92

208.99

192.66

177.48

SIP / Revenue (%)

75.51

76.29

73.22

66.49

66.03

66.43

61.03

SIP /GSDP (%)

8.08

8.10

8.16

8.07

8.47

9.22

9.17

(Salary + Pension)/GSDP (%)

6.34

6.32

6.28

6.21

6.56

7.28

7.23

Rev Deficit/Rev Receipt (%)

21.19

23.00

23.81

15.23

15.44

11.65

7.87

RD/GSDP (%)

2.27

2.44

2.65

1.85

1.98

1.62

1.18

FD/GSDP (%)

3.64

3.66

3.59

3.02

3.51

3.30

3.00

25.12

25.71

26.05

26.31

26.82

26.74

26.66

412313

462916

519896

585467

659309

745019

841871

Government Guarantees

Debt Stock/GSDP (%)

GSDP
Nominal GSDP Growth Rate (%)

13.26

12.27

12.31

12.61

12.61

13.00

13.00

Average Interest Rate (%)

7.47

7.43

7.68

7.50

7.63

7.68

7.68

Domar Gap

5.79

4.85

4.63

5.11

4.98

5.32

5.32

Page | 21