Page 54 - economic review

MACRO ECONOMIC PROFILE26

1.72 The Memorandum also noted the large and varied investments in physical and social infrastructure
made by the State over the long period aimed at the spread of health and educational services to
reach all sections of population. The State has been making efforts to maintain the infrastructure by
devoting large part of the revenues but the running deficits have often put a break on this process
and a way has to be found out of this scenario for better upkeep of the infrastructure. These structural
constraints have severely stressed the finances of the State despite the valiant efforts, such as
implementation of VAT system, made by the State to garner resources. The running deficits were
more structural than a result of financial indiscipline or laxity and call for just consideration by the
Commission.

1.73 Kerala had made efforts in making the local governments truly self-governing institutions by
devolving functions, funds, and functionaries to them. Decentralisation has resulted in creditable
outcomes in terms of reduction of poverty and the provision of public services. But decentralisation
involves additional costs for capacity building at the local level. As regards financing disaster
management, the State had argued that it faced diversity of disasters in the form of coastal erosion,
floods, droughts and lightning and the last two Commissions had allocated inadequate resources.
The demand was for raising it.

1.74 The Fourteenth Finance Commission has taken due note of most of our submissions and the
awards address many of them. While Kerala along with many other States had demanded vertical
devolution of 50 per cent of the divisible pool, the Commissions award has seen a ten per cent jump
from 32 per cent (13th Finance Commission) to 42 per cent which together with grants adds up to
48.44 per cent of the divisible pool. Our emphasis on the need to take due note of the conservation
of forests has resonated well with the Commission as the horizontal devolution formula for the first
time gave a weight of 7.5 per cent to the forest area. The demand for the dropping up of tax effort
and fiscal discipline index has also been met with resulting in the share of the state increasing from
2.341 to 2.5 per cent.

1.75 The Fourteenth Commission has moved decisively away from sector specific and state
specific schemes arguing that there has been no continuity between Commissions, their overlap
with Plan schemes, the lack of an allocation formula and lack of flexibility in use putting states in
difficulties in running the schemes. The grants have been confined to just three areas, all of which
have addressed our concerns. The three areas are: local governments (53.49 per cent), financing
disaster management (10.25 per cent) and revenue deficit (36.26). The local government grants
are formula based with 90 per cent of the weight being carried by population and ten per cent by
performance. The 90 per cent weight for population makes the award criterion simple and equitable
without unnecessarily complicating it with indices of decentralisation and so on. The performance
criterion also favours Kerala, as the Kerala Local Government Service Delivery Project over the last
four years has already prepared the State to face the requirements. The grant allocated to the State
under State Disaster Response Fund seems low but it must be appreciated that it is on the basis
of a simple and clearly worked out formula which takes into account the expenditure booked under
the relevant head during 2006-07 to 2012-13, the distance of the state from the average per capita
GSDP and rate of inflation.

1.76 Grants to meet post- devolution revenue deficit has been a long standing demand of ours
which has been ignored by previous commissions. But the Fourteenth Commission understood our
concerns well and allocated grants to meet the need. Among the major states (excluding Andhra
Pradesh for special reasons) only three have the benefit of receiving such grants, namely West
Bengal, Assam and Kerala. In the first year, Kerala will be receiving close to 10 per cent of the total
and in the second year around 8 per cent of the total coming down to 4 per cent in the third year and
zero in the last two years of the award. These are large sums which would considerably reduce the
need for borrowing to meet deficits and make available larger funds for meeting maintenance and

Kerala State Planning Board