By CL Jose
‘Debt can be restructured by elongating maturiry profiile’
KOCHI/January 31-2022: The deadly combination of a high debt-GDP ratio of about 38 per cent ,which keeps growing , and a low tax devolution rate below 2 per cent allocated for Kerala, may render the debt management unsustainable for Kerala unless tough measures are taken on a war-footing to curb the runaway expenditure.
Rajesh Kumar Singh (IAS), Additional Chief Secretary, Finance warned that the state has a breathing space given by the revenue deficit grants combined with the protected revenue under the GST compensation formula, both of which offer a two-year window to set its fiscal house in order.
Singh (writing in a note in KIIFB newsletter) however ruled out any immediate danger adding that “there could be opportunity for doing some restructuring of the debt by elongating the debt maturity profile.”
Kerala may have to cough up Rs1.75 trillion by March 2026 towards debt
The spectre of the fast-approaching repayment schedule for the huge market borrowings Kerala is now saddled with, may not be something that can be easily wished away.
The timeline for the redemption (repayment) of the state development loans (SDLs), which account for Rs1,86,658 crore or about 55.55 per cent of the total outstanding debt of Kerala as of March end, 2022, reveals that the state will have to cough up about Rs25,000 crore inclusive of interest payment which alone comes to around Rs16,000 crore and Rs9,893 crore being the principal, before March 2022.
This can soar up close to Rs1 lakh crore including the fast-growing interest loading and the principal at Rs44,238 crore, before March 2024 and possibly to Rs1.75 lakh crore including the principal at Rs80,823 crore, before the financial year 2025-26 draws to a close (all cumulative numbers).
In fact, going forward, interest overhang is going to be the biggest challenge the government will have to tackle. Moreover, the institutional investors buying state bonds (SDLs) have started seeking higher yields from states with vulnerable finances. The RBI data has showed that Kerala’s SDL has, of late, been attracting higher coupon (interest rate) compared with many states that enjoy far better finances.
The state is in a situation where almost 61 per cent of its revenue expenditure, as a proportion of total revenue expenditure, is of committed expenditure such as salaries, pensions and interest that can’t be really postponed or deferred. There are views expressed by certain budget analysts that the committed expenditure of the state far exceeds 61 per cent and could be well above 70 per cent again, challenging the sustainablity of this ‘Kerala Model’ that is ‘overly committed’ to the welfare of the government employees..
It’s not that Kerala has the highest debt in relation with its gross domestic product or GSDP. There are states that run on such ratios even in excess of 40 per cent including Punjab, Rajasthan, Uttar Pradesh and Bihar.
But unlike Kerala, they fortunately stand to receive much larger tax devolution from the Centre’s pool. Against Kerala’s devolution rate of less than 2 per cent, Uttar Pradesh enjoys a devolution rate of 17.94 per cent, Bihar 10 per cent, whereas Rajasthan receives a tax devolution to the extent of 6 per cent as per the 15th Finance Commission recommendation, and this in turn, helps these states sustain such high debt levels much easier than Kerala can, and this inevitably demands much more painful belt-tightening from God’s Own Country.
The spike in current debt-GDP ratio, of late, has been, to an extent, befallen from the upward revision of the reform-linked borrowing limit by an additional 2 per cent last year over and above the 3 per cent set by the FRBM Act.
There is no denying the fact that the state’s total debt outstanding at Rs3,35, 989 crore (Rs3.36 trillion) (in principal alone), as of March end, 2022 (estimated by RBI) has reached an uncomfortable level in relation to its GSDP, but more worrying may be the repayment schedule of the debt, plus its accumulaed interest, that stare at the already strained coffers of the state.
While SDLs constitute a little over 55 per cent of the state’s aggregate debt, the remainder of the state’s total outstanding borrowings at around Rs3,36 lakh crore (3.36 trillion) has mainly come from National Small Savings Fund (NSSF) at Rs21,095 crore; LIC and GIC together (Rs600 crore); Nabard (Rs3672 crore); banks and financial institutions (Rs5330 crore); loans from Centre (Rs17,397 crore), loans from PF or provident fund (Rs96,095 crore), etc.
Thus, the total ‘Internal Debt’ adds up to Rs2,13,614 crore though the repayment schedule for this portion is not yet clear (to businessbenchmark.news.
While the aggregate outstanding debt, excluding interest, owed by all states and union territories (UTs) comes to Rs69,47,045 crore, Kerala that accommodates only 2.5 per cent of the country’s population, accounts for about 4.83 per cent of the total debt of all the states and UTs put together.
