Kerala plans more borrowing despite deep debt – The New Indian Express


Express news service

THIRUVANANTHAPURAM: Last week, a delegation of state officials representing K-Rail was busy negotiating a loan with officials from the Asian Development Bank in New Delhi. The offer was for a $ 1 billion loan (about Rs 7,500 crore) for the construction of a high-speed train connecting Kasaragod and Thiruvananthapuram.

A few days ago, the Japan International Cooperation Agency offered a loan of Rs 19,000 crore for the project. While AfDB charges an interest rate of 1.5%, JICA’s rate is only about 0.5%.

“But what the government conveniently forgets is the added burden caused by the change in the exchange rate during the repayment period. A dollar was only Rs 45 in 2010. Think of a loan of 1 billion of dollars then used and having a repayment period of 20 years. The loan of Rs 4,500 crore used is valued at Rs 7,500 crore after 11 years. This means that despite a low interest rate, we have to repay a higher sum depending on the rupee-dollar exchange rate at the time of repayment. Usually we will end up paying 7-9% additional interest due to changes in the exchange value “, said Francis Mathew, expert- accountant and former senior financial control specialist at the AfDB.

The plan to secure a multibillion dollar loan is discussed by the government of Kerala, regardless of the fact that the state is already heavily in debt. In accordance with the budget for 2021-2022, Kerala’s outstanding debt will be Rs 3.27 lakh crore by the end of this fiscal year.

The Kerala State Gross Domestic Product (GSDP) for the year is expected to be Rs 8.76 lakh crore. This means that the state’s outstanding debt is equivalent to 37.3% of the MSRP. With the uncertainty created by the second wave of COVID and the heavy rains, there is a good chance that the GSDP will fall below the estimate, leading to a further increase in the debt / GSDP ratio.

“According to the Kerala Fiscal Responsibility Law of 2011, the sustainable debt level is estimated at 23% of MSRP. The level crossed 30% in 2013-14 and trended upwards thereafter, “said economist V Nagarajan Naidu., Former head of the economics department, Government University College.

He said more realistic indices such as debt-to-revenue ratio (RR) and government debt-to-own revenue (SOR) ratio are also dangerously high.

The debt / RR ratio for 2020-2021 and 2019-20 was 318 and 290, respectively. The debt / ORS ratios for 2020-21 and 2019-20 for 2020-21 and 2019-20 were 362 and 419, respectively. There are also other factors that show that the government is in the bad debt category.

“Good debt is the practice of borrowing and investing the borrowed money in projects that generate a high return on investment. The return will exceed the cost of borrowing in such cases. Bad debt is when you spend borrowed money on income expenses such as paying a salary and unfortunately in the recent past Kerala has spent the lion’s share of its borrowing to cover income expenses and debt service, ”said Mathew.

In 2019-2020, Kerala spent 75.6% of the borrowed money on income expenses, while 20.13% was spent to repay past loans. Only 3.85 percent of the borrowed money was used for capital expenditure. In 2018-2019, the respective figures were 84.3%, 10.31% and 4.19% respectively. “It is clear that we cannot continue like this for long,” he said.

Kerala, along with Punjab and Rajasthan, was ranked among the “States with very high debt ratios” in Crisil’s Growth States Report in 2019. These are the only states where the debt-to-GDP ratio has increased. exceeded 30%.

The argument of the drastic reduction in revenue expenditure to overcome this crisis is taken up by some economists. Reports from public expenditure review committees had provided guidance on how to reduce government spending, including salaries and pensions.

“I think expanding our economy and increasing incomes are the lasting solution. We need to exceed the debt by mobilizing more resources. Instead, if you reduce employee wages, there will be no only negative effects. Firstly, it will affect the flow of money in the company, as employees will be forced to reduce their expenses. This will affect their morale and lead to inefficiency and the risk of corruption will be higher, “he said. declared Naidu.

He suggested increasing non-tax revenue sources by introducing fees for government services other than essential services and an exponential expansion of service sectors like tourism and IT. Accepting the suggestion, Mathew said anything the government can do to promote economic activity must be done immediately.

Recently, the governments of Maharashtra and Karnataka announced stamp duty exemptions for a selected period. This has had a huge impact on the real estate industry there. A similar initiative will boost the sale of land and apartments here. also, “he said.

Another suggestion Mathew mentioned is divestment from loss-making public sector companies. “I’m not talking about KSRTC, KSEB and KWA. Let them continue to be under government control. But, there are companies like Malabar Cements, Kerala Automobiles Limited and Kerala Soaps. Why can’t we sell government shares in these companies? The money can be used to pay down and restructure government debt, ”he said.

“Divestment” is a dirty word in a left-oriented state like Kerala. Mathew said there may also be a model of Kerala divestment by protecting workers’ jobs. “The government can set the conditions accordingly. Turning a blind eye to such a proposal at this time of crisis will not be good,” he said.

What is debt sustainability?

Debt sustainability is a government’s ability to service debt, including principal repayment. The efficiency with which borrowed funds are used and the government’s ability to meet its obligation by generating additional resources are key determinants of debt sustainability.

If the debt is not sustainable, the government will find itself in the debt trap by borrowing more funds to service past debt as well as to cover its current fiscal imbalances.

Factors that suggest the debt trap

  • Debt to MSRP Ratio: According to the Kerala Fiscal Responsibility Law of 2011, sustainable debt is expected to be less than 23% of MSRP. In 2013-2014, the debt-GSD ratio crossed 30% and the ratio remained above 30% in subsequent years. The ratio is expected to exceed 37 percent this fiscal year, in line with budget forecasts.

  • Debt-to-revenue ratio: in the last fiscal year this ratio was 318% and the previous year it was 290%. This implies that the debt is three times the income of the government

  • Growth rate of outstanding debt versus MSRP growth rate: Over the past five years, only in 2018-19, the debt growth rate has been lower than the MSRP growth rate

  • Average interest rate on outstanding debt: interest rate showing an increasing trend and was highest in 2019-2020. A higher interest rate means there is a possibility of debt restructuring

  • Interest Payments / Receipts Ratio: The ratio increases from year to year, indicating that a significant portion of borrowed funds is used to repay the portion of borrowings and interest thereon.

  • Ratio of public debt repayment to public debt collection: This ratio remains very high. It was 35.78% in 2018-2019 and 35.63% in 2019-2020, indicating that more of the debt is used for debt service.

Part i

Kerala’s fiscal health has been a hot topic of debate among economists and politicians in recent years. The CAG’s latest audit report tabled in the assembly earlier this month warned the state was heading into a debt crisis.

In the first six months of this fiscal year, the revenue deficit and the budget deficit worsened beyond budget forecasts. With no control over revenue spending and no new revenue streams in sight, the LDF government is in a catch-22 situation. The first part of the series that examines what is wrong with Kerala’s fiscal health.

Government borrowing falls under the bad debt category because its outstanding liabilities are equivalent to 37.3 percent of MSRP.


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