Reporting from DUBAI: In a move that could reshape the fiscal contours of the state, the Kerala government appears to be attempting to shift a portion of KIIFB’s borrowings off its official budget books, raising questions about compliance with the Fiscal Responsibility and Budget Management (FRBM) Act.
Under a government order dated November 6, Kerala Financial Corporation (KFC) has been designated an agency of the state.
With this new status, the corporation is now increasing its lending to the Kerala Infrastructure Investment Fund Board (KIIFB) by an additional Rs500 crore without a government guarantee, a source close to the Finance Ministry told businessbenchmark.news.
The move comes as the state faces a difficult trade-off: either rein in KIIFB’s ambitious infrastructure spending or reduce market borrowings to adhere to FRBM targets.
By routing loans through KFC, a government-owned financial corporation, the state appears to be reclassifying these borrowings as government agency loans rather than conventional budgetary debt.
KIIFB, tasked with funding large-scale projects across Kerala, has traditionally relied on a mix of market borrowings and institutional loans.
Freeing from state guarantee
If guaranteed by the government, such borrowings would count towards the state’s fiscal deficit. The new arrangement seeks to sidestep this calculation by positioning KFC as an intermediary, potentially keeping the additional loans out of the government’s direct fiscal reckoning.
While the move could offer temporary relief from FRBM-imposed borrowing limits, analysts caution that the legal and accounting implications remain complex.
“On paper, it may appear off-budget, but ultimately, the state bears the repayment responsibility,” said a fiscal expert. “The real test will be whether the Comptroller and Auditor General (CAG) or the market accepts this classification.”
The government’s order not only boosts KFC’s exposure to KIIFB but also signals a broader approach to managing public finances creatively.
By leveraging a state-owned corporation, officials aim to maintain momentum in infrastructure projects without breaching fiscal rules. It is a balancing act that reflects the pressure on states to invest ambitiously while staying within regulatory ceilings.
With Rs500 crore now slated for KFC-backed loans to KIIFB, observers are closely watching whether this approach will become a model for off-budget financing or trigger debates over fiscal transparency and FRBM compliance.
The development underscores the challenges state governments face in aligning ambitious infrastructure agendas with strict fiscal discipline.
