Kerala unlikely to gain much from increased borrowing limit

KIIFB projects may take a backseat

KOCHI: Kerala is unlikely to gain much from the Union Finance Minister Nirmala Sitharaman’s recent decision to allow states to borrow up to five per cent of their GSDP against the earlier three per cent prescribed by the Fiscal Responsibility and Budget Management Act (FRBM) 2003.

That said, easing of the limit has strings attached too, whereas the full benefit of this relaxation can be enjoyed by the states on fulfilling certain conditions, though 0.5 per cent increase is automatic and without any conditions.

Close to two months into the new financial year, while the average utilisation of the borrowing limit by the states has reached only 14 per cent so far, with Tuesday’s (May 19) market borrowing of Rs1500 crore, Kerala has already reached Rs8930 crore, which is one-third or 33 per cent of the market borrowing at Rs27,000 crore, being three per cent of GSDP allowed for 2020-21 (prior to increase).

Though the FM’s announcement to raise borrowing limit may sound quite reassuring for the states, the inevitable fall in GSDP, thanks to the economic slowdown engendered by the extended COVID 19 period, could obviate, to a good extent, the chance of expanding absolute borrowings for the states as it is tagged to the size of GSDP at the end of each financial year.

The chief minister Pinarayi Vijayan himself has recently warned that Kerala state’s projected GDP may fall by about Rs1.26 lakh crore, whereas the estimated revenue income could contract by Rs35,455 crore, from Rs1.15 lakh crore to Rs81,180 crore.

“I doubt whether the state would gain anything notable from the increase in borrowing limit by two per cent as our domestic product is likely to witness substantial decline during 2020-21,” the CM said while addressing the press.

The move announced by the finance minister Nirmala Sitharaman, in theory, will proffer extra resources to the tune of Rs 4.28 lakh crore to states and could add about Rs18,000 crore specifically to Kerala’s kitty in the form of borrowing during 2020-21.

As per the new borrowing scheme announced for the states, 0.5 per cent increase will come automatically to all states, meaning Rs4500 crore for Kerala.

But hold on, there are strings attached to the remaining 1.5 per cent in the form of achieving four milestones in the Centre’s initiatives such as One-nation one-ration card, District-level Ease-of-Doing-Business ranking, urban local bodies’ revenue-related issues and Power distribution and related issues

The Kerala FM, Dr Thomas Isaac has already disparaged these conditions in no modest terms when he stated that it’s against the spirit of federalism on the part of the Centre to dictate terms for market borrowings by the states.

On the contrary, the Kerala’s ballooning debt that is hovering above 30 per cent of GSDP has already invited in enough brickbats from academia and a big section of free-thinking economists in the state and outside.

Talking to Dr Shaijumon CS (seen in the picture), Associate Professor of Economics, IIST, noted that Kerala’s model of ‘borrowing at any cost’ could send the state to an inexorable debt spiral.

“We hardly borrow to fund any revenue generating schemes, but on the contrary, they are historically to keep financing our committed expenses. The borrowing exercise is going on unabated as if the loans need not be repaid at all,” Shaijumon lamented. He said it’s high time the state allocated a good portion of its borrowed funds into agricultural and industrial ventures capable of generating revenue so as to help the state’s repayment schedules.

The fast mounting debt is going to be the hardest nut Kerala may have to crack going forward as Kerala has always remained an insatiable state as regards debt accumulation.

With the result, many experts in the field vouch, the state’s ever growing debt could prove to be the Frankenstein that will give the state sleepless nights in the years to come.

The question whether the state’s urge for debt is sustainable has started ringing in the corridors of power and even many within the government are said to have started red-flagging the danger inherent in the swelling debt.

In 2018-19 budget, state’s debt servicing at Rs39, 944 crore consumed one-third of the budget size. In 2019-20, though the budget estimated the debt servicing to absorb Rs34,940 crore or 25 per cent of the budget expenditure, it slipped further and surged to Rs62,169 crore or half (50 pc) of the total budget expenditure of that financial year, when the revised budget was finalised.

The current year budget (2020-21) has estimated that the debt servicing will account for Rs44,728 crore,  which would represent 31 per cent of the total expenditure by the state for the year.

That said, the budgeted numbers for 2020-21 are unlikely to have any bearing on the actual scenario in the new Pandemic context.

KIIFB projects may take a backseat

Will the KIIFB projects take a back seat in the new scenario when the meeting the basic needs itself has become a tall challenge before the state?

Though Dr Thomas Isaac had mentioned during the Budget speech about the plan to spend Rs20000 crore by KIIFB in 2020-21, raising such large funds from domestic or international markets would be quite difficult in the given circumstances. The Board had invited in enough criticism for paying high interest rate at 9.712 per cent for raising Rs2150 crore through masala bond last year.

In fact, KIIFB raised only a portion of the Rs5000 crore envisaged to be raised through the Masala Bond programme. The BB international rating, below investment grade, accorded by the international agencies – S&P and Fitch has been attributed by experts as the reason for KIIFB not being able to raise the required funds from international markets.

The biggest worry now before KIIFB would be whether those two international rating agencies will affirm the same rating when they go for the next rating action sometime in September or October.

A lower rating or negative outlook could jeopardise the borrowing programme of KIIFB, which has set a target of about Rs54,000 crore worth projects to be completed in the coming few years.


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