After over two years of what looked like an intense tug-of-war, the Centre seems to have finally pulled states like Kerala into submission in the off-budget borrowings issue. The Centre has insisted that states like Kerala should include their off-budget borrowings using special purpose vehicles like KIIFB in their annual borrowing limit.
Kerala is still in resistance mode, and is paying the price. The Union Government has not approved Kerala’s borrowing schedule for the first quarter (April-June) of the 2022-23 fiscal. By May 10, Kerala should have mobilised Rs 4000 crore from the open market. It was not able to.
This fund squeeze has already led to some Treasury restrictions. If this Centre-State conflict persists, Kerala’s fiscal position could turn precarious.
Convenience of off-budget loans
Kerala has been consistently opposing the inclusion of Kerala Infrastructure Investment Fund Board (KIIFB) and other off-budget borrowings in its fiscal deficit calculations.
In fact, the very reason for creating SPVs like KIIFB was to bypass the borrowing limit fixed for states. The logic was, most of the open market borrowing went into financing committed expenditure like salaries, pensions and interest, leaving virtually nothing for development expenditure. Off-budget loans that were free of fiscal conditions was the way out.
If the loans of KIIFB and other government-funded bodies like Kerala Social Security Pension Limited (KSSPL) were taken into account, Kerala’s fiscal deficit would have looked even more bloated. The latest CAG report says that KIIFB and KSSPL had borrowed Rs 1,930.04 cr and Rs 6,843.65 crore respectively during the 2019-20 fiscal, none of these getting reflected in the deficit calculations of that fiscal.
Closure of a busy bypass
The Centre has now decided to permanently shut the route states habitually resorted to evade constitutionally-mandated fiscal controls. States are legally empowered to borrow 3% of their GSDP from the open market; from this fiscal on, it is 3.5% of the GSDP.
This they fully utilised and, in addition to this, they encouraged their PSUs and SPVs to borrow heavily. According to a CRISIL Ratings study of 11 states, including Kerala, off-balance-sheet borrowings of states had reached a decadal high of 4.5% of gross state domestic product (GSDP), or Rs 7.9 lakh crore, in 2022.
These huge amounts do not figure in the annual financial statements (budgets) of these states, but are serviced out of the state budgets. KIIFB, for instance, is propped by the annual transfer of 50% of Kerala’s motor vehicle tax revenue and the whole of petrol cess.
Double whammy for states
But from now on, the Centre wants the loans taken by the SPVs, too, to be included within the borrowing limit of states. This will cause the net annual borrowings of states to shrink. KIIFB, for instance, will have to first reckon with the routine and more urgent open market borrowing requirements of Kerala before scheduling its loans. In such a situation the very existence of KIIFB could be questioned as the body was formed to operate outside such limiting constitutional and fiscal concerns.
This fiscal, states will suffer an additional deprivation. The decision to move PSU and SPV borrowings into the budget will be implemented retrospectively, from the 2020-21 fiscal. This will mean that the excess loans taken by states using off-budget mechanisms during the last two fiscals – 2020-21 and 2021-22 – would be deducted from their borrowing limit for this fiscal, 2022-23.
Will salary payments suffer?
The Centre has already asked states to furnish the revised borrowing figures for the last two fiscals. Top sources told Onmanorama that Kerala had still not provided these figures. Consequently, the Centre has refused to approve Kerala’s borrowing schedule.
Kerala has not been able to mop up Rs 4000 cr from three auctions scheduled by the RBI: April 19 (Rs 1000 cr), May 2 (Rs 2000 cr), May 10 (Rs 1000 cr). This has caused a slight fiscal squeeze, threatening to derail salary and pension disbursement in May.
Finance Minister K N Balagopal, even while conceding that the Centre had not sanctioned Kerala’s open market borrowings, said the situation would not affect salaries and pensions. “I hope the Centre will not behave in a vindictive manner,” he said.
Why Centre and CAG despise KIIFB
The Centre’s logic was spelt out in the Monthly Summary Report of March put out by the Department of Expenditure. “These off-budget borrowings by the states have the effect of bypassing the net borrowing ceiling of the state by routing loans outside the state budget through government-owned or statutory bodies despite being responsible for repayment of such loans. Such borrowings have an impact on the revenue and fiscal deficits and thus have the effect of surpassing the targets set for fiscal indicators under Fiscal Responsibility and Budget Management (FRBM) Act.”
The latest Comptroller and Auditor General Report on Kerala Finances has also flagged the issue. “Even though repayment of the borrowed amount and its interest (by KIIFB) are being financed through Government revenue, the Government’s financial documents do not reflect these borrowings,” the CAG report said. “The liabilities of KIIFB are a direct charge on the Government’s own revenue resources and are thus a direct liability of the State Government,” it added.