The story so far: Over the past few months, Kerala’s mounting debt liabilities have been brought into sharp focus with the Reserve Bank of India, the Comptroller and Auditor General (CAG), and the opposition Congress-led United Democratic Front (UDF) flagging the issue.
Kerala Infrastructure Investment Fund Board (KIIFB)
A body corporate constituted by the Government of Kerala to mobilise financial resources outside of State revenue for infrastructure development of the State
Kerala Social Security Pension Ltd (KSSPL)
A state government entity for seamless disbursal of social security pensions by raising money from the open financial market and delinking pension payments from the State’s treasury
The State’s financial situation was recently highlighted by Kerala Finance Minister K.N. Balagopal in his sharp response against a slew of Central financial policies: cutting the fiscal deficit grant by ₹7,000 crore; discontinuation of the Goods and Services Tax (GST) compensation worth around ₹12,000 crore; and a proposed move to consider the “off-budget” borrowings of State government entities such as the Kerala Infrastructure Investment Fund Board (KIIFB) and Kerala Social Security Pension Ltd (KSSPL) as part of the State debt when fixing the State’s net borrowing ceiling.
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Here is a breakdown of Kerala’s public debt situation:
What is the state of Kerala’s public debt?
In June, the State Government informed the State Assembly that the cumulative debt of the State, as of March 2022, stood at ₹3,32,291 crore. This is a big leap from ₹1,89,768.55 crore in 2016-17. And according to the CAG, the ratio of public debt to the Gross State Domestic Product (GSDP) has risen from 20.43% in 2019-20 to 27.07% in 2020-21.
Why is Debt-GDP/GSDP ratio important?
It compares a government’s public debt to its gross domestic product (GDP). By comparing what a country (or a state) owes with what it produces, the debt-to-GDP ratio indicates the ability to pay back its debts.
State finances have, in recent years, been marked by a steep rise in revenue expenditure, which has gone up from ₹91,096.31 crore in 2016-17 to ₹1,23,446.33 crore in 2020-21. Committed expenditure on interest payments, salaries, pensions etc. form a significant portion of this spending.
What is the CAG’s latest assessment of Kerala’s finances?
In the latest audit report on State Finances, the CAG advised the State to closely monitor debt sustainability and make ‘‘earnest efforts’‘ to maintain a healthy debt-GSDP ratio. Open market loans constituted 54% of the total fiscal liabilities of the State. The committed liability of the Government as a percentage of the revenue expenditure rose from 61.22% in 2016-17 to 68.01% in 2019-20.
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The CAG has also frowned upon off-budget borrowings made through KIIFB and KSSPL, whose combined outstanding liability equals ₹16,469.05 crore as on March 31, 2021. The KSSPL’s outstanding liabilities of ₹10,848.61 crore constituted 65.87% of the total outstanding off-budget borrowing. During 2020-21 alone, Kerala resorted to off-budget borrowings to the tune of ₹9,273.24 crore. The CAG observed that they ‘‘will have an impact of increasing the liabilities of the State Government, leading to a debt trap over a period of time.”
The CAG further observed that the government should focus on the growth of its own tax revenue and take measures to improve it. Revenue receipts of the State increased from ₹75,611.72 crore in 2016-17 to ₹97,616.83 crore in 2020-21, recording a growth of 29.10%. However, the State’s own tax revenue, the main source of revenue in revenue receipts, increased by only 13% and its share in the State’s revenue decreased from 55.78% in 2016-17 to 48.82% in 2020-21. This points to the poor collection of tax revenue during 2020-21, when the COVID-19 pandemic gripped Kerala.
What is RBI’s analysis?
In June this year, a Reserve Bank of India (RBI) article, ‘State Finances: A Risk Analysis,’ prepared against the backdrop of the Sri Lankan crisis, swung the spotlight on the fiscal health of states with a higher volume of public debt. Kerala was identified as one of ten states with the highest debt burden, based on the debt-GSDP ratio.
Among the ten, Kerala also found a place in a sub-set identified as ‘‘highly stressed.’‘ The RBI article noted that the own tax revenue of states including Kerala have been on the decline, rendering them vulnerable.
Kerala is also among three states where the debt-GSDP ratio is projected to exceed 35% by 2026-27, a situation which requires ‘‘significant corrective steps’‘ to stabilise the debt level, according to the RBI.
What is the State Government’s position?
Kerala Finance Minister K. N. Balagopal, responding to the ‘debt trap’ warning, had maintained that while the State was indeed passing through a crunch phase, there was no danger of it free-falling into a debt trap. He has also been critical of the Centre’s stand that off-budget borrowings should be considered part of the State debt, and reflected in the net borrowing ceiling.
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Kerala has repeatedly blamed central policies for most of its current financial problems, especially the dip in its tax share from the Centre and the discontinuation of the Goods and Services Tax (GST) compensation beyond June 2022.
At the same time, the State has launched efforts to step up tax collection. Last week, the Cabinet gave the nod for comprehensively revamping the State GST Department, a step which is expected to have a positive impact on increasing tax revenues.
What is the way ahead?
Experts advise a lean-and-mean strategy for the State at this juncture, keeping revenue expenditures down, while stepping up tax collection. The State will also need to put in serious efforts to stabilise debt levels, a step which the RBI too had recommended as a medium-term corrective measure for debt-burdened states.
In the long-term, however, both Mr. Balagopal and his predecessor Dr. Thomas Isaac understands that the State will have to grow its industrial output. Kerala needs to accelerate development, generate jobs using the possibilities offered by the knowledge economy and, give a fillip to the production sector, Mr. Balagopal had opined before presenting this year’s budget.
Incidentally, Kerala has improved its ranking in the Ease of Doing Business (EoDB) index, a World Bank initiative of ranking States and Union Territories based on the business environment, by jumping to 15th rank from the 28th position in 2019. Moreover, as per the State Industries Department, Kerala is outpacing its 2022 target to register 1,00,000 Micro, Small and Medium Enterprises (MSMEs) with more than 42,000 units registered during the first quarter of the current financial year. Minister for Law, Industries and Coir P. Rajeeve has informed that the government has re-estimated its target from 1 lakh to 1.5 lakh MSMEs by the end of 2022-23.