THIRUVANATHAPURAM: Finance Minister T M Thomas Isaac has invoked the names of two late economists, Sir Roy F Harrod and Evsey Domar, to drive home the point that the State’s rising debt was sustainable. However, the fact remains that the ratio of revenue deficit to fiscal deficit, a pointer to the seriousness of the debt situation, is all set to rise in a disproportionate manner from 48.77 percent in 2010-11 to 56.56 percent in 2011-12.
According to Isaac, as long as the Domar Gap (the difference between the nominal GSDP growth rate and the average interest rate, a measure derived out of the Harrod-Domar model) was positive, the debt situation was sustainable. The State’s estimated GSDP growth rate during 2011-12 is 15.40 percent. The average interest rate is 7.48 percent. The Domar Gap, therefore, is a positive 7.48 percent. Hence, according to Isaac, the debt is sustainable.
But the debt profile of the State shows some disturbing signs. One, the proportion of the State’s own revenue used to finance debt is increasing. Isaac says that this is mainly on account of the implementation of pay/pension revisions and the increased devolution to local bodies this fiscal.
Two, the proportion of provident fund, small savings, insurance and security deposits in the total debt has dwindled alarmingly. If the rate of growth of the State debt has come down by nearly 2 percent, from 12.17 percent in 2009-10 to 10.37 percent in 2010-11, the reason is the precipitous fall in small savings and provident fund. The other debt components like internal debt and loans and advances from the Centre have shown a substantial rise, 17 percent in the case of internal debt and 200 percent in the case of Central advances.
Small savings and provident fund, from Rs 21,296 crore in 2009-10, dropped to Rs 19,821 crore in 2010-11, a negative 6.93 percent 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 percent). 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 fall in the public account could mess up Isaac’s economic strategies. ‘’At a time when the Centre is putting curbs on the finances of the State, this public account comprising of small savings and provident fund offer the state greater freedom. By improving the quality of service and offering fair interest rates, the State could attract more such deposits. This in turn will pump in more money to the budget to be used as capital expenditure,’’ Isaac said in his book ‘Keralam: Mannum Manushyanum’.
What’s more, the State’s debt position is the worst in South India. The three other South Indian states - Andhra Pradesh, Karnataka and Tamil Nadu - have a much lower debt/GSDP ratio and per capital debt liability.
Source; expressbuzz.com, February 15, 2011
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