Kerala's economy is predominantly agrarian in nature. In terms of per capita income and production, Kerala is lagging behind many of the Indian States. But in terms of Human Development Index and life standard of the people, Kerala is much ahead of the most other states in India, and in fact in certain development indices, it is on a par with some of the developed countries. This peculiar paradox often termed as the KERALA PHENOMENON or Kerala model of development by experts, which is mainly owing to the performance of the State in the Service Sector.

Though the state’s fiscal imbalances continued to prevail in 2010-11, there were hopeful signs of recovery. Revenue deficit, which stood at `2638 crore in 2006-07 and rose to `5023 crore in 2009-10, came down to ` 3674 crore in 2010-11. This improvement was attributed to the 18.70% growth in revenue receipts vis-à-vis 11.3% in revenue expenditure. The reduced growth in Non-Plan expenditure was largely due to the deferment of the major portion of expenditure by way of pay and pension revisions due in 2009-10 to 2011-12. As a proportion of GSDP, revenue deficit declined to 1.4% in 2010-11.

The State’s high incidence of revenue deficit is mainly attributed to the higher level of devolution to local self governments for their developmental expenditure, which is actually used for asset creation.

Similarly, grants given to the Universities and other autonomous bodies like the Kerala Road Fund Board etc. for capital asset creation also get accounted as revenue expenditure, contributing to overall revenue deficit of the State. If such expenditure, which ultimately results in asset creation in the State, is excluded from the purview of revenue deficit, the effective revenue deficit would be in the range of `1326 crore, which is 0.48% of GSDP.

The budget for 2011-12, had projected a revenue deficit of `5534 crore, which would work to 1.81% of GSDP, the increase being largely due to the pay and pension revisions for the employees and the consequent payment of arrears of pension and salaries. The higher level of devolution to local self governments as per the recommendations of the 4th State Finance Commission was also a major contributory factor for the enhanced revenue deficit. According to the Kerala Fiscal Responsibility (Amendment) Act 2011, the State Government is committed to achieving a revenue deficit target of 1.4% against the 1.8% envisaged in the budget for 2011-12. Given the present trend in revenue receipts and expenditure, the target is hard to achieve.

For more information: www.spb.kerala.gov.in