For the last 12 days since 8 August, Kerala has seen incessant rains, making 7.5 lakh people homeless. Help has been pouring in from various government agencies, security forces and social sector. However, to get the state’s economy back on track, it will need a huge financial backing from the central government. Here are three reasons why:

State’s tax revenues are limited

For every one rupee of revenue collected, the state’s own tax revenue is 57 paisa. Transfers from the Central government, through share of central taxes and grant-in-aid, account for 30% of total revenue receipts. Kerala is not unique in this aspect though. Fiscal dependency on the Centre, with very weak tax base, is a feature in almost all states in India. However, the crisis worsens the situation.

Expenses are consistency higher than receipts

For every five rupees that the Kerala government spends, it borrows a rupee. That’s true for the Centre’s finances too, which funds one-fourth of the expenses through borrowing. Economists call it “inter-generational burden", since money is borrowed to meet today’s expenses and the next generation has to pay for it. This means, it has very little elbow room during crisis situations such as this.

Little room to cut expenses

Just three expenses heads — salaries, pensions and interest payments — take up 80% of the state’s own revenues, leaving little for other expenses. The money from the Centre is crucial to create assets. With no room to spend from their own revenue, the Kerala government has to depend on the Centre to meet the flood-related expenditure. Salaries, pensions and interest payments are liabilities that the state government has no choice but to incur. With more debt added each year, interest payments are expected to grow higher. The budget estimates for 2018-19 is lower, but final numbers are likely to be higher.

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