THIRUVANANTHAPURAM: The new revelation by the Kerala Finance Minister Dr Thomas Isaac that the loss suffered by the state mauled by the devastating floods recently could even measure up to Rs1lakh crore, has thrown up a big question mark before its people.
The issue gets confounded further with the stark realization that even if the Centre green-signals the State’s demand to raise the borrowing limit by 1.5 percentage point, a solution to the rehabilitation and rebuilding of the state would remain a damp squib for long, for want of funds.
Talking to mediapersons, the Finance Minister said the government would approach the Centre to raise the borrowing limit from the stipulated 3 per cent of the state GDP by another 1.5 percentage point so that Kerala coffers will have the room to raise an additional amount of around Rs11,000 crore.
Foreign aids, Centre’s contribution, the flow of donations from within the state, which is extremely encouraging, support from corporates, the newly introduced tax on alcoholic beverages, the lottery planned to help finance the rebuilding of Kerala, 10 per cent cess the State has proposed to be charged on GST, are some dependable sources of funds that may help take the reconstruction work forward.
Experts in the field rule out the chance of the Centre conceding Kerala’s demand for raising the borrowing limit by 1.5 percentage point. “On the one hand, Kerala already carries the highest revenue deficit (estimated for 2018-19) among all states and on the other, the fiscal deficit projected for 2018-19 is also one of the highest in India,” said Dr BN Prakash, noted economist, while talking to businessbenchmark.news from Thiruvananthapuram.
Where will the God’s Own Country go with the ‘begging bowl’ for the funds to build houses for the thousands of the displaced by the deluge or to handhold the hundreds of thousands, who have been thrown into destitution overnight at the hands of nature’s fury?
The finance minister argues that the three per cent limit need not be viewed as a sacrosanct number and that it’s not a big deal too. Referring to the recession period, Dr Isaac said, “The fiscal deficit of the Centre has risen to 6.2 per cent of GDP in 2008-09 at the height of recession, against the target of 3 per cent set by the Financial Responsibility and Budget Management (FRBM) Act.”
In fact, the flipside then was that IMF had estimated the fiscal deficit to be as high as 8 per cent after accounting for oil bonds and other off-budget expenses. Until and unless the Centre gives the go-ahead to sidestep the FRBM prescription that the fiscal deficit needs to be checked at 3 per cent of the state GDP, Kerala will end up staring at the end of the road on funding needs.
Dr KN Harilal, the planning board member, though is averse to building up further debt as the state is not in a position to shoulder the burden of more of it in the wake of a tough period ahead, argues that Centre can very well consider the State’s demand positively considering the alarming situation in Kerala.
“In May 2016, the NK Singh panel set up by the Centre to review India’s fiscal discipline rules has recommended some flexibility in FRBM rules on deficit targets on both sides – downwards when growth is good and upwards when it is in opposite direction,” Dr Harilal explained while talking to businessbenchmark.news.
The recent news that the State had discussed loan plans with a visiting team from World Bank has surprised many an expert on public finance, for the states are not allowed to approach foreign agencies for funding without the concurrence of the Centre. Businessbenchmark.news doesn’t have confirmation as to whether the Centre’s go-ahead was there for this exercise. And if yes, the above view doesn’t hold good.
Dr Vijayakumar, chief investment strategist, Geojit Financial Services, is of the view that the loans from international agencies such as World Bank do come to us without giving much burden to the state as they charge very minimal interest compared with the commercial rates.
“World Bank channelises such loans through its soft loan window – International Development Agency (IDA) more in the form of assistance with interest close to zero per cent and with longer tenure, albeit the expenses being incumbent on the receiver.
“Having said this, any loans for that matter, need to invariably fall under the framework of the borrowing limit prescribed by the FRBM Act,” Vijayakumar noted while explaining his stand on the issue.
While Dr KN Harilal wants the state to overcome the dire state befallen Kerala without an overdose of debt, Dr Vijayakumar believes the Centre is unlikely to allow the borrowing limit to be raised by 1.5 percentage points in one go.
“Centre will certainly assess whether the State can repay these loans. These loans being primarily envisaged to be spent on rehabilitation and reconstruction within the state, any returns are ruled out from these loans, leaving the repayment difficult,” he explained further.
The business community as well as noted economists in the state honestly believes that reconstructing Kerala is indeed a tall order before it given on the one hand, the huge funds required for the mammoth exercise, and on the other, the poor financials of the State with an estimated GSDP of around Rs7.72 lakh crore and almost exhausted deficit financing limits.
Dr BA Prakash said the State’s fiscal position is so bad that it is relying on borrowed funds even for the day-to-day expenses. “The recent floods have further rattled the state’s finances and hence, without the Centre’s unrestrained help, Kerala will fall into a financial chaos,” Dr Prakash said.
In fact, most states have been religiously observing restraint on borrowing, resulting in the consolidated fiscal deficit of the states to the combined GDP being curbed at 2.6 per cent against Kerala’s 3.10 as per the budget estimates for 2018-19.
It is pertinent to note that only three states have a Gross Financial Deficit (GFD)-GSDP ratio above four per cent – Goa, Jammu & Kashmir and Himachal Pradesh (HP) (estimates for 2018-19) with HP’s pegged above 5 per cent.
This means that if Kerala is allowed to borrow a further 1.5 percentage point, Kerala will enter the small group of the most indebted states in terms of GFD-GSDP ratio for 2018-19 (budget estimates).
More importantly, while most states have come out with revenue surplus for the 2018-19 budget estimates, Kerala’s revenue deficit at Rs160 billion (Rs16,000 crore) is the highest among all states.
Gross fiscal deficit at Rs257.6 billion (Rs25,760 crore) is already the fifth largest as per the budget estimates for 2018-19. Kerala’s debt stock which was at Rs1,57,370 crore during 2015-16 has grown to (an estimated) Rs2,37,266 crore for 2018-19. During this period, the state’s Gross Domestic Product (GSDP) has grown from Rs5,57,947 crore to Rs 7,72,894 crore (estimated) for 2018-19.
The state has already raised Rs8500 crore during the current year from the market through the issue of State Development Loans (SDLs), Rs3000 crore having been raised during the month of August alone. Total debt as a percentage of GSDP is currently estimated to be 30.70 per cent.
However, the repayment pressure on loans for the immediate future is not that heavy as more than 68 per cent of the repayment of state development loans (SDLs) (outstanding) will come up for redemption only after five years from now.
The chief minister Pinarayi Vijayan has already made a clarion call to the state government employees to donate a month’s salary to support the government efforts to rehabilitate the affected, and also to rebuild a New Kerala.
A political commentator observed that the request from the Kerala Government will prove to be a proverbial bitter pill to swallow for the Centre. “The Modi Government cannot afford to say a ‘no’ to the state for the fear of it turning out to be a politically unintelligent stand on its part on the ‘eve’ of a fast approaching national polls, especially because on the other side stays a battered state, which is being sympathized by the governments and different groups from the world over, and also being hailed for the steely determination it displayed in facing and overcoming the devastating floods, and the aggressive relief work it has taken up cutting across all political affiliations,” he further observed.
