Tuesday, August 23, 2016

Interview with Dr. Thomas Isaac, Kerala’s Economist Finance Minister

Seasonal Magazine recently met Dr. TM Thomas Isaac, Finance Minister of Kerala, for this exclusive interview.

“A revolution is a struggle to the death between the future and the past,” wrote Fidel Castro. If the Cuban legend meant the then emerging struggle between socialism and capitalism, the beauty of the quote is that it is eternal, timeless.

Revolution is not finite, but continuous. Capitalists have had to adjust, and even the socialists.

Dr. TM Thomas Isaac is definitely dreaming of a future where the capitalists will be forced to adjust more. But he is not oblivious to the fact that even socialists will have to adjust for meeting future head on.

He feels that there is no better model to be emulated than the Kerala Model of development. Few can compete with his argument, as this model has catapulted the tiny southern state to be a leader in Human Development Index.

At the same time, without prompting, Dr. Thomas Isaac is candid enough to admit that the Kerala Model is long pending for an overhaul.

This pragmatism sums up this proud communist intellectual.

Kerala’s Finance Minister has his rationale for backing GST which basically comes from the Congress & BJP camps, but he won’t mince words when he takes on the Modi-Jaitley combine for their silent killing of decentralization in India by finishing off Planning Commission and by usurping Plan Funds that belonged to the states.

An economist himself, Dr. Thomas Isaac feels that RBI should have cut rates faster and deeper, but adds in the same breath that without supporting fiscal policy that contained inflation it was impossible to do so.

Once a vocal critic of economic liberalization, he finds no charm left in debating whether the 90’s liberalization move was right or wrong.

But he will gently remind that all our current achievements haven’t happened post liberalization, pointing to India’s impressive gains in the pre-liberalization era in areas like public industries, green revolution, and basic infrastructure.

Even the most passionate capitalist can’t hoodwink him into admitting that it was all gung-ho in India after liberalization and globalization. Dr. Thomas Isaac will immediately point to irrefutable facts about the growing inequalities and the widening income gap between various sections of our society.

Kerala’s FM is also ready to give credit where it is due, as when he credits Kejriwal with experimenting with a real-time software system to prevent tax evasion by traders. The Minister is planning a similar system in Kerala, which will be even more foolproof due to a clever modification he is introducing.

Wherever and whenever Kerala is unprepared to meet its emerging challenges, Dr. Thomas Isaac is frank enough to admit it. Examples include state’s unpreparedness to handle the exodus from Middle East and the falling rubber prices.

He often has only bitter medicines to prescribe – like moving away from rubber – but he is willing to handhold those affected by offering them alternatives.

The first budget he presented in this term as Finance Minister has already attracted national attention for its innovative measures for raising funds by way of Special Purpose Vehicles (SPVs) that will tap the Indian bond market.

A champion crusader against corruption and tax evasion, he is all set to repeat record tax-collection growth rate in the state, just like in his earlier term.

But in some things he remains a cautious communist at heart, like in his total disapproval for private universities being empowered to give degrees in the state. But for that unmet need too, Dr. Thomas Isaac has alternatives to offer in the public sector.

Once a passionate agriculturist too, he is little swayed by marginal innovations like grow-bags, aquaponics, or precision farming, and would any day prefer to leverage Kerala’s natural strengths like excellent soil and good rainfall for agriculture productivity.

Seasonal Magazine interviews Dr. Thomas Isaac, Minister for Finance, Kerala Government:

GST Bill has finally been cleared by Parliament. As an early adopter of GST among all state finance ministers, how do you view this development and the importance of GST?

The states lost out in autonomy with regard to tax collection way back, when VAT was introduced by the Centre. So, in my opinion, there was no point in holding out against GST, which is better conceived, as it is a progressive step with ease-of-doing-business in mind. We don’t stand to lose out more than we have already lost. Secondly, Kerala is a consumer state, and thirdly, our economy is mainly based on services, and my hope is that these two factors will make GST more favourable to our state.

How was the opposition to this move, in your party?

None of these points are contested by our party. But as a matter of policy, CPM is against the Centre encroaching on the rights of the states. So, topmost party functionaries have to articulate along those lines. There were discussions in the party on this, and as the Finance Minister of Kerala I had to take a practical stand on the basis I mentioned just now, that with GST we don’t lose more than what we have already lost.

India and especially Kerala is staring at a massive return of expatriates from Middle East. How prepared is our economy to handle this situation. What are your short-term and long-term plans?

Kerala is not at all prepared to handle this situation, if this does materializes. We also can’t expect much help from the Centre, as their trend is to look at it as a regional issue. Just like the price crash in rubber or cardamom hasn’t emerged as a national issue, this exodus from Middle East, if it happens, will be ignored. It will be up to Kerala to find solutions for this. That is why in my first budget, I took some unusual steps to address this. Firstly, this can cause a regional recession, and that is why there has been an anti-recession package amounting to Rs. 20,000 crores in the budget. Obviously, the Kerala budget can’t accommodate such an amount for this purpose, but we will raise these funds through Special Purpose Vehicles for various large projects, which will tap the Indian bond market for the first time. This will pump in money into our regional economy and drive creation of public infrastructure, which in turn will attract private investments into the state and cause creation of significant new jobs. Surpluses from these projects will be utilized for rehabilitation of the Gulf returnees as they need to be re-integrated into our socio-economic fabric.

Will you be tapping overseas bond markets for the same?

No, for the time being I would like to avoid that, as overseas bond market participation will make us dependent on forex rates which can fluctuate wildly, and cause unnecessary risk. There is no need either, as apart from the Indian bond market, there are other under-utilized reserves in the state itself.

Can you elaborate on a couple of such sources?

Well, our cooperative banks for instance. Together they have around Rs. 40,000 crores in surplus. Another one is Kerala State Financial Enterprises. KSFE, as you know, is basically a chit firm, and every Malayalee is very knowledgeable about how chit products work. Now RBI has given permission to float NRI Chits, which KSFE will utilize, and we are hopeful of raising around Rs. 25,000 crore through this route. Some of this can be invested in the project SPVs. Then there are SEBI settled special instruments like Investment Funds that attract short-term funds for long-term projects like infrastructure, which may sound contradictory, but there is a structure for it which has proven successful. It is aimed at the corporate sector, but even a state or a state-owned entity can very well tap into it.
You have been fortunate to return as the state's FM. You must be remembering what all you planned back then vs. what all worked. How are you broadly modifying your strategies based on this, in the current term?

During my last term, the biggest achievement was raising the annual rate of growth in tax collection to over 18%. During the last UDF government it has again slipped to 12%, and now one of my prime objectives is to get back to 20-25% growth. I am planning various steps for achieving this, which should come to fruition soon. Firstly, we are going to implement a software based system that will scrutinize all returns on over 90 variables, to detect anomalies. This is possible because, now we have several years of tax data in the servers. This new system will generate intelligent reports shortlisting cases where officers need to further scrutinize, and if necessary, intervene. This first step should be ready within two months.

What would be the next steps?

The next one would be even more ambitious, something that Arvind Kejriwal too is experimenting in Delhi. Under this, every trader on a real-time basis will have to upload a copy of his bills to our servers. But I know there would be computer programs using which only 50% of the bills would reach us. To prevent this, what I am planning is to offer consumers a competition – they can take a photo of the bill in their mobiles and send it to us through phone itself, and the system would be cross-checking whether that bill has been officially submitted to us. If the consumer sends in a bill that is not in our records, he will get 5 times the tax he paid as a gift. Consumers are highly likely to do this with larger bills where their tax expense is high. It will be a competition called ‘Lucky VAT’ or something like that. The risk of being caught red-handed thus by the tax authorities will greatly minimize evasion. It will be a foolproof system.

Don’t you think rooting out corruption is also as important?

Of course, rooting out corruption from the tax department has always been important, and in fact, one of the biggest achievements during our last term, was at the State Check Posts including the main Walayar Check Post. I had offered cash reward of Rs. 25,000 for anyone providing proof for corruption at Kerala Check Posts, which went unchallenged for four years or so. We also did an independent social audit on the performance of check posts. Another area in which we did social audit, where more than 70,000 people participated, was about the operation of our treasuries, and it led to widespread improvement in how treasuries operated, back then.

Are you planning any new initiatives with regard to treasuries now?

Yes, we are going to modernize treasuries in a big way. Within months, you will see core banking being deployed across the Kerala treasuries. We will also make it mandatory for all employees and pensioners of state government and its corporations to get their salaries through treasuries. This will vastly improve the cash balance situation of the treasuries. Of course, employees and pensioners can give standing instructions to automatically transfer their funds or part of funds to a bank account of their choice. As an incentive to keep it in treasury, we will provide 1% more interest to account holders. This will improve the condition of the treasuries, and make more funds available for development activities. This will enable the Finance Department, which is blocking most such proposals, to become a Finance Department that say ‘yes’ to all productive proposals.

Do you have any model of development either from any Indian state or abroad that you wish to see implemented in Kerala?

No. We are very proud of our Kerala model of development that has ensured better standards across education, health, welfare etc. Having said that, I am also aware that Kerala model of development needs to be renewed, it needs to be modified on several fronts. It has fallen short on a few fronts, the most significant being less than required performance in high-quality job creation. So, we need to continue providing welfare measures, but at the same time, we must be growing much faster. Kerala is already growing above the national average, but that may not be enough. We need to invest in, as well as attract private investments, in some of our core sectors like information technology, tourism, value-added products etc.

What would be the major initiatives on the education front, that the finance ministry is keen on supporting?

There would be a major overhaul with all high school and higher secondary schools being digitalized. Every classroom will have laptop, LCD projector, screen etc. There will be centralized resource centres. 1000 schools will be made into Centres of Excellence with world-class infrastructure.

If eminent academicians of Kerala origin come back to the state to start Centres of Excellence, how will they be encouraged?

They will be encouraged wholeheartedly, and we will also provide them short-term positions in our universities and research centres.

But Kerala is yet to allow private and deemed universities. Are you considering that move during this ministry? 

No, we are not considering private universities at all. Instead, we are going to modernize all our university centres in a big way, to make them world-class. Big money is going to be spent on these centres. We will make them top-notch and offer short-term positions there to eminent NRI/NRK academicians to raise our higher education standards.

What if they want to start autonomous centres?

We are open to that idea, but not as degree-granting institutions. They will operate as affiliated centres of our universities. I studied and taught in one such autonomous centre – Centre for Development Studies (CDS). Fully autonomous with no meddling by any government secretary. That is the model to follow.

But will these eminent academicians find our university centres or institutes appealing?

At present no, and as an academician and researcher myself, I can vouch for that. Precisely this is why our prime focus will be to upgrade our university centres to world-class standards first.

Two of Kerala economy's big strengths - rubber as well as Gulf money - are facing irreparable damages. Do you foresee Kerala economy taking a hit due to this?

Yes, we are going to face serious implications. No structural reforms are possible in rubber anymore. We have to move away from rubber. On the Gulf crisis too, we need to find alternatives, there is no other way.

There is an ongoing debate whether RBI could have cut rates deeper and faster. What is your stand as an economist FM, and what is your rationale?

My view is that the rates should have been cut deeper and faster. The simple rationale is that India has potential to grow much faster. The current high interest regime is preventing that. But whether RBI could have done this is debatable because they have to limit inflation. So, we have to first look at where the inflation is coming from. Reality is that inflation can be controlled better by cutting the taxes on petroleum products. When crude went down, taxes were hiked by the Centre, and when crude went up from the lows, why are the taxes not being cut? That is a big source of inflation. This Central Government burdens people with faulty fiscal policy that charges high taxes on petroleum products which increases inflation across all products and services, and then the Centre expects the monetary policy to contain that inflation. That is meaningless. Fiscal policy needs to be corrected first, before RBI can act further on interest rates.

Do you foresee any challenges for Kerala from the proposal to merge SBT with SBI?

Yes, that is one bank with strong historical and emotional roots to Kerala. State Bank of Travancore itself was formed by the amalgamation of 12 regional banks in the state. SBT’s investment decisions therefore have a Kerala focus, whereas SBI’s investment decisions are being determined by its global positioning. Kerala is no priority for SBI. That regional roots of capital determine investment decisions is well-known and is one of the conclusions in Amiya Kumar Bagchi’s monumental study titled ‘Private Investment in India’. So our disapproval for SBT-SBI merger is not just emotional; it is going to affect regional growth adversely.

Kerala Government is planning to promote its own bank. What are the broad objectives that you are planning for this institution?

There are several options before the Kerala Government. First option is to convert one of our NBFCs into a bank, which is the strategy RBI is favouring. But there are too many issues involved like upgradation of manpower etc. Second option is to start a new bank, which too we are not favouring at this stage. Instead, we will be strengthening and integrating our cooperative banking system. Now there is a three-tier system of cooperative banks, and we will convert it into a two-tier system. The state-level and district-level co-operative banks would be merged. The resultant bank would be one of the largest in Kerala with over 800 branches, and the distinct advantage is that it can attract NRI investments in a big way. We may need to recapitalize it, but this apex bank can be a major player in the state working under RBI guidelines. Depositors will get added protection, with no hanky-panky. We plan to start this integration work soon so that this apex bank can be formed during this term itself.

You have been a pioneer in decentralization policies. How much room is there for improvement in this regard between Centre and states, and within states?

Between Centre and the states, instead of things getting decentralized, the reverse is happening. The present Central Government doesn’t believe in decentralization at all. They are already on the verge of closing down the Panchayati Raj Ministry after cutting down its budget from Rs. 7000 crore to just Rs. 96 crore. Modi doesn’t want to select and encourage model panchayats anymore, but ‘model villages’ whatever that means. But the biggest blow to decentralization has been the removal of the Planning Commission. This has centralized a huge amount of money into the hands of the Centre, from the hands of the states. Regarding non-plan expenditure, the states anyway didn’t have much judgment to wield – items like salaries, pensions, interests etc that anyway have to be paid. The states had discretion only with plan funds, which could be used judiciously for developmental activities. Now, this whole corpus of funds has been moved to the control of Arun Jaitley and Narendra Modi. They are erecting the most centralized financial structure ever attempted anywhere in the world, so that they can release funds to whoever finds favour with them. No formula and no guidelines. Many people do not understand the implications of this sudden change that has been forced upon the country.

What about NITI Aayog then?

NITI Aayog is just fictional. Absolutely no powers in resource allocation, and purely in an advisory role. The removal of Planning Commission and centralization of plan funds into the hands of PM and FM is more troubling not due to the unhealthy centralization alone, but due to the arbitrariness built into the sharing of these funds. Just on their whims and fancies at that time, which will be dictated by their political needs at that time.

What about the BJP-NDA claims that Kerala has got a better deal from the Centre than when UPA was in power?

That is absolute rubbish. Whatever Kerala received has not been by the grace of Modi. It is by the recommendations of the 14th Finance Commission of India headed by Dr. YV Reddy which was appointed in 2013, and whose recommendation is valid from 2015 to 2020. This Finance Commission sharply increased the share of states from the shareable pool of taxes from 32% to 42%. Every state was benefitted and so was Kerala. There is no point in Modi Government claiming any credit for this.

What about decentralization within states?

Within the states, it is good that the Finance Commission has given a fair deal to the local self-governments. In Kerala, the state government too is giving generous funds to these local governments. This has resulted in a peculiar situation in that the local self-governments are better off than the state government, when it comes to availability of untied funds or free funds for doing developmental works. Having said that, there is enormous scope for improvement in the expenditure of these funds by local governments. Lack of innovation, lack of people’s participation, and increasing corruption are all serious issues with how they operate. So what we are going to do is a second edition of People’s Plan Campaign by which development will move from this level of equilibrium to a higher level of equilibrium.

Startups are in big momentum across India's various metros. Though our youngsters too are doing their bit, are you satisfied with the progress we have made? Are there any plans to back promising startups?

Yes. Enough is happening to prove that the startup movement is the right path to follow. Kerala’s future is in knowledge industries, services, high-skill industries etc where startups are only natural. Money is not the prime mover here. Innovative ideas and entrepreneurship skills will decide the course. They will raise their money. Kerala also has a huge pool of highly educated workforce. Government’s focus would be to create an ecosystem that encourages startups.  Soon we will implement a plan by which 1000 best ideas would be given Rs. 2 lakhs each, and after assessing the progress in their implementation, 50 among them would be given Rs. 2 crores each as startup support with no security. The objective is to create a new generation of entrepreneurs in the state.

Standing in 2016, what is your take on the economic liberalization jump that India took in the early 90s? Was it necessary, or unnecessary, or was its implementation just skewed?

It is debatable whether it is possible to have an alternative and be cut off from contemporary globalization. Now it has become fait accompli and there is no point in debating the right and wrong of liberalization. One thing to be remembered is that India is performing better now, not only due to liberalization, but due to the investments in public institutions, industry, and infrastructure that happened before liberalization. One major problem with the post-liberalization period has been that inequalities are building up, and income gap is widening between various sections of the society.

Since land is at a premium in the state, are there any plans to boost agriculture through novel methods like aquaponics or precision farming?

I don’t think they are going to be widely adopted in the near future. Kerala is a tropical region with heavy rains. These technologies were developed in semi-arid regions. We mechanically aping them is not so great. Same with grow-bags that many are using nowadays to grow vegetables. I find them detestable, increasing pollution when so much good soil is available. The same with polyhouses; maybe rain-guards have a utility in the state.  I am not against any of these innovations, but I don’t think these are suitable for large scale adoption in our state.

Your budget was hailed by many as groundbreaking and idealistic. Which budget proposal are you most keen on seeing implemented in this term?

I want all the proposals to be implemented but I am most keen on the Kerala Infrastructure Investment Fund Board (KIIFB) to start performing. Different bonds will be issued for different projects. Also, government revenues will be used. 15% of motor vehicles tax and 1% cess on fuel are also being considered for KIIFB. This model of development is uncharted territory for the state and there will be challenges that should be overcome. Secondly, I want to achieve 25% tax growth; which will be a record.

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