Amidst The Digital India Push, Kerala Has A Problem Like No Other State 

Prime Minister Narendra Modi’s announcement on 8 November, withdrawing the legal tender status of Rs 500 and Rs 1,000 notes has received sundry response from different quarters. Even though various state governments have raised their concerns regarding demonetisation, opposition from Kerala has grabbed everyone’s attention. All the major politicians of Kerala, cutting across political parties, gathered to mark their dissent against demonetisation.

Finance Minister of Kerala, Thomas Issac, has been vociferous on the issue. He argues that the decision to phase out Rs 500 and Rs 1,000 currency notes will negatively affect the economy of Kerala. Demonetisation can result in a decline in economic activity that will be reflected in the state’s tax revenue collection. It is estimated that tax growth in Kerala will fall below 10 per cent in the months of November and December. In the wake of demonetisation, the Reserve Bank of India (RBI) restrictions on transactions in primary cooperative banks are an added threat, as they play an important role in Kerala’s economy.

Large crowds before the treasuries from the start of December highlight another important issue in Kerala. Pensioners in the state were forced to make multiple visits to the treasuries to collect their pensions. Though Kerala claims to enjoy 100 per cent banking penetration, a large share of pensions and salaries is still disbursed through treasuries and not through bank accounts.

Unlike in many other states, the treasuries department plays a pivotal role in Kerala. The Department of Treasuries under the Finance Department is a big entity in Kerala with around 3,500 employees. As on March 2015, there were 23 district treasuries, 193 sub-treasuries, 12 stamp depots and an e-treasury functioning in Kerala. It is also interesting to note that following demonetisation, Kerala is the only state to demand a bank status for its state treasury.

The demand for bank status is mainly due to the presence of Treasury Savings Bank (TSB) that is unique to Kerala. TSB is used by the government for making transactions, which include payment of salaries and pensions and as a means for mobilising resources. At present, there are around four lakh pensioners and five lakh employees in Kerala. Hence, in a month, the government of Kerala makes around nine lakh transactions. In 2015-16, the total expenditure on salaries and pensions amounted to Rs 36,361 crore (according to budget document) and if the whole amount is credited to the TSB accounts of pensioners and employees rather than to their bank accounts, the government will benefit as it guarantees more financial space. By routing salaries and pensions through bank accounts, the government would lose substantial amount of funds that was left at its disposal.

Through TSB, the government can also mobilise deposits from its employees, pensioners, institutions and the public. As per a report by the Comptroller and Auditor General (CAG) of India, during 2014-15, the state government received Rs 24,553.04 crore as deposits at an average interest rate of five per cent and Rs 3,920.06 crore as treasury fixed deposits at interest rates ranging between 7.25 per cent and 9.25 per cent. TSB is not regulated by RBI. It offers high rates of interest on its saving deposits and fixed deposits, compared to other commercial banks. Thus, TSB gets undue benefits over other commercial banks whose interest rates are regulated by RBI.

The government has the freedom to decide on how to make use of the funds that are mobilised through TSB. It explains why the treasuries department is an integral part of a state like Kerala, whose fiscal health is always strained. The working capital of Kerala Infrastructure Investment Fund Board (KIIFB) is now parked in the TSB account of Trivandrum District Treasury. It will not be surprising if the government uses the same funds for paying salaries and pensions, since it is easy for the government to make use of the funds parked in TSB. It is a common practice in Kerala that at the end of each financial year, each government department withdraws its budget allocation and parks the funds in TSB without spending them.

Even though there have been many debates on the need to scale down the operations of the treasuries department and to limit its status as an accounting department, it continues to play an important role in Kerala. Various measures undertaken by the successive governments of the state signal the fact that they want to strengthen the treasury system in Kerala. For instance, the government of Kerala was planning to provide core banking solutions such as net banking, mobile banking, ATMs etc to TSB account holders. RBI declined the request for introducing ATMs in TSB, citing that its working distorts the fiscal discipline imposed upon state governments. For instance, apart from utilising the funds mobilised through TSB for covering its fiscal deficit, the government of Kerala also borrows from National Small Savings Fund (NSSF) like other states. TSB thus provides an additional avenue for the Kerala government for meeting its expenditure. The high level of borrowing and the active role played by TSB shows that it is difficult to bring in fiscal discipline in Kerala. For instance, the total deposits in TSB accounted for about 21 per cent of the total liabilities of the state government, data from the budget documents shows.

Kerala offers an interesting case. The state with the highest banking penetration and largest number of bank accounts also follows outmoded methods for paying salaries and pensions. If we take the examples of other states, salaries and pensions are transferred to bank accounts. But Kerala, the digital state of India, is sustaining a large department merely for the payment of salaries and pensions. If salaries and pensions are transferred to the bank accounts of employees and pensioners, the government will lose substantial control over the funds and will be forced to downsize the treasuries department. The existence of the department gives the government unrestricted access to funds that can hamper the fiscal discipline imposed upon the state.