Kochi: A comprehensive reform process will be necessary for Kerala to break out from the current financial crisis, according to a study. "At the same time, the reforms should not be such that it leads to retardation."

As per the Kerala Financial Accountability Law, revenue deficit should be nullified by the year 2006-07. And the gap between revenue deficit and domestic produce should not be above 1.5 per cent. It will be difficult to achieve this if the management style of previous governments continues, according to the study brought out on financial management by the Kerala government.

Though there was awareness and desire to reduce deficits and income shortfalls in the nineties, it had in fact increased during this period. During 1999-2000 deficit was 7.3 per cent of the total income. In 1990-91 it was at 4.8 per cent. Revenue shortfall went up from 2.6 per cent in 1990-91 to 5.8 per cent in 1999-2000.

The study indicates that the measures taken to avert the crisis may in fact lead to its worsening. The government borrows at higher interest rates. It borrows from such high interest funds like provident funds and savings accounts. In 1991, loans from such sections were about 26.5 per cent of the government's total borrowings and in 2001 it went up to 42.6 per cent.

In the same period, borrowings from the central government went down from 48.8 per cent to 29.7 per cent. About 69 per cent of the new high interest loans have been utilised for paying off previous loans, according to the study. Just to pay interest 58 per cent of the amount is used.

The crisis during the end of the nineties was due to the decrease in revenue income rather than spending. It indicated a major drawback in the ability to accumulate funds. Growth of tax and non-tax incomes declined sharply in the second half of the nineties and was down to 4.8 per cent. In the first half it was 20.9 per cent. Tax income growth fell from 20.4 per cent to 11.9 per cent.

The growth rate of agriculture income tax rate was 16.6 per cent. In the second half, it too went down (-14.2 per cent). Sales tax growth figures too took a beating from 20.6 per cent to 13.8 per cent. The same story repeats in the case of excise revenue - from 21.8 per cent in 1991-95 to 16.3 per cent in 1996-2001. The growth rate of vehicle tax too was stunted.

More than making tax collection more efficient, it will be more beneficial for Kerala to increase non-tax revenues. Non-tax income is just 10 per cent of the revenue income. In the case of non-tax income too, Kerala lags behind other states. For the various services provided by various departments in 2000-01 was just 4.4 per cent of the revenue income.

Not just that, return on investment too is low - just 5 per cent. The return on investments made in KSRTC, Electricity Board, Water Works Department and in the cooperative sector was just 0.63 per cent. The largest number of public sector enterprises is in Kerala. Up to 2000-01, Rs 3,544 crore was given to public sector institutions a loan. Investment was to the tune of Rs 1,883 crore.

The policies of the central government too have negatively impacted the state. In 1990-91, the share from the centre was 5.2 per cent of the state's total income. In 1999-2000 this fell to 3.6 per cent (the share received by Kerala is lower than that compared to that of other states).

The measures like reduced spending taken to arrest the increasing financial deficit since 2001-02 is temporary in nature. The study has indicated that the sudden reduction in spending has had negative impact on the income generating capabilities of various sectors.

The withdrawal or reduced spending in such sectors like education and health could be detrimental. The perception that the Kerala model, which gave emphasis on spending on social sectors, is the reason for the financial crisis is proved wrong by studies conducted by Dr K J George and K K Krishnakumar.