Governor’s stance on public borrowing may kickstart fresh debate

Recent speech at assembly seeks ‘no-strings-attached’ state borrowing

THIRUVANANTHAPURAM: The recent call made by the Governor, Justice P Sathasivam, to scrap the conditions attached to the public borrowing by the state may kick-start a new debate on the state finances and the role of FRBM Act on public borrowing.

The Governor made this plea to the Central government while addressing the members of the Legislative Assembly of Kerala state last week as a precursor to the budget period.

Demanding the sharing of the divisible pool among states be raised to 50 per cent from the existing level of 42 per cent, Justice Sathasivam said, “No condition is to be imposed on public borrowing.”

He said his Government (Kerala) had played a significant leadership role in raising the issues affecting the States because of the mandate given to the l5th Finance Commission.

“Detailed Memorandum was presented to the l5th Finance Commission during their visit to Kerala from May 28 to May 31 2018,” he reminded during his speech where he batted wholeheartedly for the state especially on the efficient role played by the government in containing the fallout of the devastating floods of August.

However, the call to scrap the conditions on public borrowing has taken many a financial expert by surprise. Talking to, Dr VK Vijaykumar, leading economist and investment strategist at Geojit Financial Services, debunked the demand of the state on this as totally untenable.

“States need to control profligacy and the stated role of Fiscal Responsibility and Budget Management (FRBM) Act 2003 is to make sure the states do not exceed the borrowing limits set for them,” Vijaykumar said.

He also reminded that the brunt of States’ excesses will have to be borne ultimately by the Centre and if the states are let free to borrow at their will, it will certainly lead to financial anarchy in the country.

Referring to the controversy surrounding the applicability of census data with respect to the year, the governor had said the terms of reference (ToR) of the 15th Finance Commission mandating the use of 20l1 census data for population criteria should be withdrawn.

He argued that a specific weight may be assigned to a criterion of Demographic Goals Achievement, which should be introduced in the Tax Devolution Formula, while highlighting the need to raise it to 50 per cent.

Following the August floods that broke the back of the state, Kerala Government had sought the permission of the Centre to raise the limit to borrow, from the current 3 per cent to 4.5 per cent so that the state would be able raise an additional Rs10,500 odd crore that could be used to help rebuild the state, but after more than five months since the floods, the Centre has not heeded the pleas from the state.

The finance minister Dr Thomas Isaac, an economist by himself, also went vocal against the Centre’s stubborn stand on the three per cent limit set for borrowing. Dr Isaac, viewed by many as a proponent of borrowing, had approached the Centre several times with this demand.

The Fiscal Responsibility and Budget Management (FRBM) Act was enacted in 2003, which set targets for the government to reduce fiscal deficits.

The committee recommended that the government should target a fiscal deficit of 3 per cent of the GDP in years up to March 31, 2020 cut it to 2.8 per cent in 2020-21 and to 2.5 per cent in 2023.

However, it remains a fact that the the targets were put off several times. In May 2016, the Central government set up a committee under NK Singh to review the FRBM Act and many in the Government believed the targets were too rigid.

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