Home / News / India /  How to make sense of Kerala's mega COVID-19 financial package

ERNAKULAM: Kerala's mega financial package of Rs20,000 crore to mitigate the impact of the deadly coronavirus and counter its economic fallout has raised several eyebrows. Not only is the state the first in the country to offer such a package, it was also a record of sorts for Kerala itself. The sum is unprecedented for a state that was rowing back to normalcy after history's worst floods in 2018 and its devastating repeat in 2019.

The bulk of Kerala's multi-crore package is basically frontloading the state's FY21 spending to the next three months in many ways, anticipating a severe demand slowdown in the immediate period after the coronavirus outbreak, according to people familiar with the matter.

The state government expects the centre to chip in too at some point, if at least in increasing borrowing limits and changing central norms on using disaster relief funds, they said. Kerala's finance minister Thomas Isaac confirmed the plans. "Where is money from? What is the magic? Elementary my dear Watson! We are frontloading borrowing and spending to beginning of new fiscal and redesigning some of the schemes," he tweeted on Friday.

Kerala is one of the richest states in India with the majority of households in the affluent category, top human development rankings and high spending powers despite being poorly industrialized. However, commercial activities are currently nearly partially paralysed over the virus scare in the state. Kerala has 25 active COVID-19 patients so far, and over 30,000 people in quarantine.

The number of fresh patients has been coming down, even as many are under lockdown. Two strong pillars of the economy— tourism and remittances which make up one-tenth of the state GDP each— have nearly come to a halt. A third one, alcohol, which forms a significant part of the own revenue and still sells despite the virus— is also under attack as there is a growing uproar to ban it during the tough times.

Under this backdrop, a set of policymakers, finance ministry officials and others sat down for three days and put together the financial package, said R Ramakumar, member of Kerala's planning board and economics professor at Tata Institute of Social Sciences.

"Kerala's health situation is largely becoming stable, although we don't know when it will go back to worrying times. The idea behind the package is to shift focus to the economy even as we closely follow the evolving health situation," said Ramakumar.

"Obviously, it should be clear that the state does not have such a large amount to be additionally spent. 20,000 crore is almost two-thirds the size of state's annual plan. What the state is going to do is to see that there is immediate spending over the next three months. The stimulus is sort of formatted this way: Next three to six months, what is going to be spent by the state will be substantially higher than what would otherwise be spent during the same period in a normal year," he said.

The plan is made with an assumption that this crisis is going to linger on for about six months, and a slowdown would be inevitable, Ramakumar said.

Kerala chief minister Pinarayi Vijayan on Thursday had announced some focal points of the package. Two months of welfare pension are going to be paid in advance. Those families who are not eligible for welfare pensions will be handed out of Rs1,000.

All needy families will get free food grains from the public distribution system. A subsidised meal program, to give meals at 20, will start in April and will be available universally. Also, loans worth 2000 crore will be made available through Kudumbashree, Kerala's millions-strong women's only network.

The announcement also includes a Rs500-crore health package, which will be likely used to create more isolation facilities and improve the state's public health infrastructure in general, to cope up with a possible health crisis. "A substantial investment will be made in health, over a span of four months, which is otherwise spent over a year," Ramakumar said.

The bulk of the spending in the package, 14,000 crore, is to clear by April all arrears of the state government as of today.

"This is not money to be paid to contractors, which has a separate discounting route of payment… Arrears of social security pensions, scholarships etc will form the major part of this component. Further, auto vehicles will be given relaxations in fitness charges. There will be a tax relief for passenger vehicles, which will be affected as the transport sector goes into shutdown mode. There is a reduction in entertainment tax, as cinema theatres will remain shut. There is also a relaxation in the payment of water and electricity bills that will help industries and individuals," said Ramakumar.

If it spends the money for next year in the next few months, how does the state expect to pay bills later in the year? The line of thinking is that centre will chip in. Kerala has already asked to allow existing money in the State Disaster Relief Funds (SDRF) account to be converted for the relief. It has also asked the centre to upwardly revise the ceiling on state borrowings as part of the FRBM Act.

"During social distancing, work is obstructed. We want to protect workers through direct payments, loans and social pensions, and assist employers through relaxations in tax payments, even though the state may not be able to fully compensate for the total loss of business. This is where the centre should come in and help further," Ramakumar said.

Beside the package, Vijayan has already sent letters to the RBI Governor and the Nabard Chairman requesting specific help in debt relief and a moratorium on loans. Nabard is also requested to ease liquidity in the market and provide room for concessional loans for affected sectors.

The CM has requested Nabard to halve interest rates to 2% for short-term loans on agricultural operations, and reduce interest to 5% from 8.4% on short term loans to small enterprises like handlooms and artisans. Nabard also been requested to provide an extra Rs2,000 crore from its rural infrastructure development fund.

The State Level Banker's Consortium or SLBC has approached the Reserve Bank of India to provide a one- year repayment holiday for loans in the state.

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