Analysis | Centre takes its toll on KIIFB, yet Balagopal may squeeze capex this election year

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A year ago, before the 2024-25 Kerala Budget was presented, Onmanorama had asked former finance minister Thomas Isaac whether there was a Plan B to sustain the high spending on public infrastructure as the BJP-led Centre seemed obsessive about wrecking Kerala's inventive development funding model, Kerala Infrastructure Investment Fund Board (KIIFB).
"I am still sticking to the old plan, because 2024 is an important year. I will look forward to see a political change that will allow Kerala to bargain better," Isaac said during Onmanorama's Budget Conversations held in January 2024. Isaac's hopes for a political change at the Centre have been dashed.
The third Narendra Modi dispensation, though a tad weaker, has not weakened its resolve to undermine KIIFB. Kerala has taken the dispute to the Supreme Court but till a verdict is given, KIIFB's borrowings will have to be stuffed into Kerala's annual open market borrowing space (3% of the GSDP). In simple terms, the Centre will subtract from Kerala's borrowing every penny that KIIFB borrows.
Rise and fall of KIIFB
Earlier, every penny that KIIFB spent had remained outside the Budget, beyond the restrictions imposed by the Fiscal Responsibility and Budget Management Act. KIIFB was a kind of boon with which Kerala could wish anything that only megabucks could create -- coastal and hill highways, fibre optic networks, high capacity power transmission lines, petrochemical parks, hi-tech schools -- and still keep its deficit untouched.

The boon has lost its spell. Kerala has been asked to dream within the Budget space. Now there is an uneasy jostle for fiscal space: KIIFB's big capital requirements compete with the budget's plan outlay for sparse funds. Result: Both have shrunk.
RBI tolls for change
KIIFB is further handicapped by a 2024 RBI circular that has asked public sector banks to refrain from funding projects for which the repayment is done by governments from their budgets. KIIFB's cash chest is annually nourished by flows from the Kerala budget; 50% of the annual motor vehicle tax and the petrol cess in its entirety (Rs 3500 on average annually).
After the RBI circular, this state support is reason enough for some of the KIIFB's biggest lenders like SBI, Canara Bank, and NABARD, to ditch the Board.
KIIFB can still win these lenders back. "Once KIIFB gets more projects on revenue earning mode, this will not affect KIIFB," KIIFB CEO K M Abraham said. The CEO, however, did not say that this meant the imposition of neoliberal levies on the public. Even now, at least 25% of KIIFB projects -- TransGrid 2.0, K-FON, petrochemical park -- are planned as revenue-generating projects.
In the changed politico-fiscal framework, the proportion of revenue yielding projects in the KIIFB project mix should be enhanced. The talk of 'tolls' and 'user fees' for KIIFB projects are nothing but cunning leaks made to gauge public sentiment before a major policy decision is taken to transform KIIFB into a self-sustaining special purpose vehicle like the National Highway Authority of India (NHAI).
Ballot constraints
But a quick restructure of KIIFB can be safely ruled out in an election year -- the local body polls will be held in Kerala in the second half of 2025 and after that, by mid 2026, Assembly elections will be declared.
The Left cannot be expected to all of a sudden change the character of KIIFB from an entity that transformed public schools to one that collects tolls. KIIFB symbolised the 'Left alternative' for the CPM.
If the CPM wants to retain its Left purity for political purposes, KIIFB will have to be pulled out of the fast lane.
Till December 31, 2024, KIIFB has approved 1147 projects worth Rs 87,408.62 crore. And in eight years, it has disbursed Rs 32,797 crore.
Life sucked out of plan
In the fight for resources, the government seems to favour KIIFB projects over plan components. By the end of August last year, the government had effected a massive fiscal compression -- plan schemes for the 2024-25 fiscal were either dropped fully or chopped by 50%.
Even big welfare schemes that the government prides itself on looked neglected. Take Life Mission’s two schemes: Life Parppida Mission Rural and Life Parppida Mission Urban. For Rural, the allocation is Rs 500 crore. The utilisation by the fag end of this fiscal is 24%. The allocation for Urban is Rs 192 crore, and there has been virtually no utilisation even by the first week of February (0.84%)

Sample Food and Civil Supplies. The Annapoorna Food Security Scheme for the aged destitutes has been abandoned this fiscal. The plan to revamp Supplyco outlets, for which Rs 10 crore was set apart, was also axed.
In his last Budget speech, it was with the fire of an evangelist that finance minister K N Balagopal spoke of how Kerala was on the cusp of becoming a 'sunrise' economy. Fact is, not even 10% of the money allocated for Kerala Startup Mission was spent. Not a single rupee was spent on Kerala State IT Infrastructure Limited (KSITIL), though Rs 134 crore was allotted.
Vizhinjam International Seaport was at the heart of Balagopal's 'sunrise' dreams, he called it the "gateway to future development". He said Rs 500 crore will be set apart as the first tranche of the Rs 3000 crore the state would invest in four new projects over three years: Vizhinjam Seaport, dry dock at Cochin Shipyard, International Ship Repair Facility and LPG import terminal at Puthuvypin. Rs 49 crore has been spent on Vizhinjam this fiscal, but no money was spared for the other three. For 'major infrastructural projects' for which Rs 300 crore was allocated, the spending was zero.
Crisis as convenience
This capital expenditure crisis -- the Centre-induced dismantling of KIIFB and the 'fund squeeze'-induced neglect of plan expenditure -- will be carried forward. But in the next fiscal, it will be a compulsion. Being an election year Balagopal will not be keen to reverse the trend.
As usual the 2025-26 budget figures will also project high capital expenditure but as always it will be an accounting guile to create the illusion of a lowered fiscal deficit.

In 2023-24, Balagopal said his capital expenditure would be Rs 16,986 crore. But when the CAG published the final figures in January this year, it was revealed that he had spent just Rs 13,584 crore. Last Budget, he estimated his capital expenditure for 2024-25 as Rs 15,680 crore. By the end of December, he has spent Rs 10142.53 crore, 64% of the target.
Suspicious prudence
Shrivelled up capital expenditure can give Balagopal the aura of efficiency. Low capital expenditure also means low fiscal deficit.
Thanks to capital expenditure contraction, 2023-24 fiscal saw Balagopal lowering his fiscal deficit to 2.99%. He had originally budgeted for an FD of 3.45%. Even Kerala Fiscal Responsibility Amendment Act 2022 had allowed the finance minister an FD of 3.5% for 2023-24.
Such dubious fiscal prudence will be on show during the ongoing 2024-25 fiscal, too. Balagopal had budgeted for an FD of 3.40%. With capital expenditure curtailed like never before, he would once again throw up a 'commendable' sub 3% FD figure.
Mass mobilisation
During the coming 2025-26 fiscal, being an election year, it will be all the more important for Balagopal to be tight-fisted with capital expenditure but extremely generous with revenue expenditure.
Social welfare pension, now a monthly Rs 1600, could be hiked. The setting up of the 12th Pay Revision Commission, long overdue, could be announced. Now that the Centre has notified the Unified Pension Scheme, Balagopal might offer an update on the 'Assured Pension Scheme' he had briefly introduced in his last Budget speech.
Since the LDF government is busy wooing back voters, there will not be any major tax mobilisation measures like last year and the year before it when Balagopal announced a surfeit of tax/duty/fee increases that would fetch him Rs 3000 crore and Rs 1000 crore respectively.
After the Lok Sabha drubbing, the government is so wary of hikes that it slashed by 50% building permits that were bumped up in 2023.