Will the Centre’s financial brakes leave Kerala dry? | Kerala News

Thiruvananthapuram: Several Indian states have raised their voices against the Centre’s decision to impose severe restrictions on the loans they could qualify for. The Telangana government even considered calling a session of the State Assembly to pass a resolution against the central decision.

Kerala’s finance minister also voiced the state’s displeasure at a press conference. Considering the precarious financial situation of the state, the Center however allowed Kerala to borrow Rs 5,000 crore.

New Delhi’s approval to borrow Rs 5,000 crore will help the state temporarily overcome the crisis. But it is clear that the Center has not reconsidered its decision to curb borrowing. Once the Center makes a final decision and implements its plan, Kerala would be plunged into a deep financial crisis.

The crisis could affect the payment of salaries to employees, in addition to having a negative impact on the distribution of service and welfare pensions. In addition, the State would be forced to cut short several projects announced in its Budget.

The treasuries would further tighten the purse strings and most departments would lobby the finance department for funds. This could eventually lead to an administrative crisis.

silver track

A budget deficit is a deficiency of a government’s revenues in relation to its expenditures announced in the budget. The government will be forced to borrow when expenditures exceed its revenues.

The central administration informs each State of the amount it could borrow during each fiscal year. This is informed at the beginning of the exercise itself.

Based on the advice of the Centre, each state is mandated to notify the Reserve Bank of India quarterly of the amount it plans to raise through loans each week. The central bank is preparing an indicative borrowing schedule.

The Reserve Bank notifies the amount each state wishes to borrow and the repayment term every Friday, based on the borrowing schedule. The loans, issued in the form of bonds, are granted through an auction conducted on the RBI’s core banking solution, E-Kuber, every Tuesday.

Banks and large institutions participate in the auctions. Individuals are also allowed. States are generally granted loans at an interest rate of 6 to 9%.

Kerala model

Kerala can borrow up to 3.5% of its Gross Domestic Product (GSDP) in the current financial year. The GSDP has been pegged at around Rs 10 lakh crore, allowing him to borrow Rs 32,435 crore. The loan, granted by the Center, is known as the State Development Loan (SDL), intended to carry out development activities.

The state, however, spends around 75% of the loan to disburse the salaries of government employees and to distribute service pensions and welfare pensions to around 50 lakh people. The remaining amount will be needed to cover day-to-day government expenses. In short, the SDL is not spent on development work.

The current crisis

Kerala had decided to borrow Rs 1,000 crore in April and Rs 5,000 crore in May, and the RBI prepared its timetable based on this plan. But the plan was launched after Central Finance Secretary TV Somanathan wrote to states, including Kerala, seeking details of loans they had taken out from public sector companies and other agencies. .

Somanathan also warned against taking disciplinary action against civil servants if states provide misinformation. The warning was seen as a deterrent to states borrowing more by submitting incorrect information.

The government guarantees loans made by most public sector companies, including the Kerala Infrastructure Investment Fund Board (KIIFB). If the institutions do not repay, the government (guarantor) will be responsible for repaying the loan. Therefore, the Center considers loans made by KIIFB, public sector companies, other semi-public sector institutions as those raised by the government.

Investments by individuals in Kerala State Treasurys and Financial Enterprises (KSFE) are also considered as loans made by the government. The Center has taken a position that such off-budget borrowing through institutions and agencies should be included in the States’ annual borrowing limit. Central Finance Secretary Somanathan’s request for details came in this context.

Kerala, on the other hand, has asked the Center not to include off-budget borrowing in the annual borrowing limit. The center has not yet made a decision on the request.

Center Barrier

Even the central government borrows to implement its development projects, and the Center is not opposed to state loans. However, borrowing beyond repayment capacity will push states into the debt trap.

The Fiscal Responsibility and Budget Management Law (FRBM Law) was passed by the Center and the State to avoid such a debt trap. The law ensures that budget revenues and deficits, tax ratios to GDP, and total debt are within prescribed limits.

The FRBM law, passed in 2003, was amended in 2017 and 2018 due to the global recession. The law also permits domestic borrowing through the Reserve Bank.

Impact on Kerala

According to the March 31 report of the Comptroller and Auditor General (CAG), the government of Kerala is the guarantor of the loans granted by 36 public sector institutions, including the KIIFB. The total liabilities of these institutions is Rs 31,800 crore.

The Center may not include full liability in the State’s annual borrowing limit. Kerala, however, will be in dire financial straits if even half of the liability is included in its limit of Rs 32,435 crore. The crisis will worsen if the GST compensation also dries up next month.

Although the state’s finance minister has assured that the salaries of government employees will not be affected, the state may withhold part of the monthly salary and pensions, as it did during the peak period of the COVID-19.

Meanwhile, rumors from the Secretariat say Finance Ministry officials have already recommended withholding 30% of wages, and the government is considering reducing it to 10%. Sources close to the finance minister, however, denied rumors that it was a mere political ploy ahead of Thrikkakara’s by-election.

Who is right?

Several experts are of the opinion that the Center should have considered the impact of the implementation of a brutal reform, which would derail the budgets of the States, and would create a period of financial insecurity. It is widely expected that the Center will consider States’ apprehensions before making a final decision.

The first Pinarayi Vijayan government, however, preferred to dismiss the CAG’s criticisms of off-budget state borrowing. Instead, the government has politicized the criticism. The CAG had taken a position that the borrowings of public sector institutions like the KIIFB should also be included in the government account. The Center now tows the CAG line.

Certainly there will be strict restrictions on borrowing by other institutions, although the Center is now taking a lenient stance. The KIIFB has done about 75% of the state’s development work. Once all borrowings are consolidated into one account, the loans can be used either by the KIIFB or by the government. It could also be the end of the KIIFB, a special purpose vehicle launched to overcome the annual borrowing limit envisaged in the budget.

Loans obtained by other institutions with government guarantee

(Amount in Rs crore)

KSFE: 12,974

Agricultural Cooperative and Rural Development Bank: 5,830

KSRTC: 3,178

Kerala Urban and Rural Development Finance Corporation: 3,054

SA social security pension: 1,773

Kochi Metro: 1,110

Backward Class Development Society: 1,078

KTDFC: 832

Kiifb: 550

Women’s Development Society: 394

Travancore spokes: 345

Matsyafe: 168

Kerala Finance Corporation: 117

Disability Welfare Society: 62

Scheduled Castes and Scheduled Tribes Development Corporation: 47

Traco cables: 47

Minority Society: 40

Water Authority: 34

Coco Corporation: 28

Mills of Kollam: 26

Kerala Electricity: 18

University of Advanced Legal Studies: 18

Khadi Village Industry Council: 15

Priyadarshini spinning mills: 10

Consumers’ Cooperative Federation: 8

KSFC Staff Cooperative Society: 7

Kerala Autos: 5

Crafting Society: 5

Corporation of Craftsmen: 4

Rehabilitation Plantation Ltd: 4

Malappuram Mills: 2

Ninth indebted

(Amount in Rs lakh crore)

Uttar Pradesh: 6.29

Tamil Nadu: 5.88

Maharashtra: 5.26

West Bengal: 5.01

Rajasthan: 4.33

Karnataka: 3.96

Gujarat: 3.56

Andhra Pradesh: 3.36

Kerala: 3.29

Madhya Pradesh: 2.84

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