The unasked question in the KIIFB debate

The most important question arising from the Report of the Committee on a Comprehensive Review of KIIFB (the Committee) has not yet been asked: does the Government of Kerala intend to stand by the Original Suit it filed in December 2023, now referred to a five-member Constitution Bench of the Supreme Court? Has it decided not to press the State’s plea on fiscal federalism under Articles 14 and 293 raised forcefully earlier ? In effect, has Keralam already conceded that the Union Government’s power to determine States’ borrowing limits is absolute?

Media headlines and television discussions have focused on KIIFB’s functioning, the Enforcement Directorate’s action over Masala Bonds (fully redeemed two years ago), the alleged “higher cost” of KIIFB borrowings, and its contribution to infrastructure, from school buildings and bridges to roads. Yet even two former Finance Ministers who weighed in on this debate, apparently missed the point: has the present Government accepted the core of the report that endorses the Centre’s stand on off-budget borrowings.

For Kerala watchers, the October 2026 report appears to carry forward dutifully the central premise of the June 2026 White Paper placed before the Assembly. Both seem to agree that the question of whether KIIFB’s borrowings constitute State borrowings has been settled. If the political leadership accepts this premise, there is little to contest in the report’s recommendations. It is shutters for KIIFB, let’s accept that.

But then, it would mark a fundamental departure by the State on fiscal federalism. Kerala accepts the current position. States propose, the Centre disposes.

The second striking feature of the report is its finding of deviations from business rules, constitutional propriety and financially unsound decisions. The 2016 amendment to the original Act of 1999 was unanimously passed by the Kerala Assembly without even a line of dissent. If there were serious issues of governance, there are forums like the Public Accounts Committee of the Assembly where these matters should have been raised . One would be keen on knowing whether the PACs discussed KIIFB in the last 10 years. Moreover, KIIFB’s Board includes the Chief Secretary and the Secretaries for Finance, Finance (Resources) and Law. An independent Advisory Commission, headed by a former CAG of India, also oversaw its functioning. Is it not, first and foremost, an indictment of these officials when you say that almost everything about KIIFB needs fixing?

The Committee identifies the 2016 amendment to the 1999 KIIFB Act, and two Government Orders issued in 2016 and 2018 as the reasons for deviation from KIIFB’s trodden path. The signatories to those orders and all KIIFB Board approvals till date are serving bureaucrats. Alleged violations of business rules and, worse, would inevitably involve these officials. Public-interest warriors will now take the Committee observations to their logical conclusion: vigilance review, accountability and personal liability.

The Chief Minister has already indicated that vigilance enquiries will be considered (regarding KIIFB financing a Kerala Govt entity for land acquisition). Thus, on the KIIFB chessboard, I fear that the major pieces will be senior bureaucrats. And each move will affect them more than the political leadership. That the trial in the palm oil import case of 1991 (indicting a former CS of impeccable credentials) has not yet started is worth recalling.

The Committee apparently has also overlooked an important matter of procedure. Normally, such committees invite all key stakeholders to hear them out as part of due process and fairness. Did the Committee hear the KIIFB Advisory Commission’s senior officers (including its Chairman, a former CAG and respected senior voice, a former RBI Executive Director and a retired bank CEO) or KIIFB’s former CEO, himself a former Chief Secretary and longtime Finance Secretary of Kerala? If yes, the minutes may please be put in the public domain. If not, why not?

If this was not done, it would raise doubts about whether even the terms of reference were “loaded” from the outset. Consider one of the terms of reference to the Committee: to examine whether borrowings, including Masala Bonds, caused avoidable costs or losses, including from parking borrowed funds in lower-yielding deposits or investments (sic). Does such a “loaded” reference need even an answer ? Isn’t this more a conclusion than a question? Or the question of SC/ST sub-plan allocations from KIIFB , despite the report itself acknowledging that no statutory requirement mandates such allocations (page 67). What conclusions can a Government-appointed committee reach when its terms frame the questions so pointedly towards “desirable” recommendations ?

The criticism about government guarantees for all of KIIFB’s borrowings, the allegedly higher borrowing costs and Masala Bond interest rates also reflects a failure to appreciate KIIFB’s original rationale: financing infrastructure when budgetary borrowing for infra-spend was constrained by the FRBM framework with the Centre enforcing the fiscal deficit norm for all States (that Kerala was singled out does not wash). And till 2022, the Centre was also not including off-budget borrowings in its own deficit calculations.

There is an obvious anomaly here. The Centre does not adhere strictly to the fiscal deficit target but enforces it for the States. The Centre’s deficit had reached as high as nine per cent a few years ago and remains around 4.5 per cent now. The FRBM Act mandates a uniform 3 per cent (ultimate target) for both Centre and all States, without differentiation.

KIIFB was born as a result of this compulsion: borrowings through the budget had hit a cul-de-sac. It is a fact that Govt-linked entities (sub-sovereigns) routinely pay a premium over government securities, depending on liquidity and perceptions of the borrower. They are not sovereigns. So the Govt security coupon and the bank/institutional finance rate differ.

And lenders to Kerala State Govt-entities hardly need a reason for asking a premium; local economists and the media often do that work for them. In which other State does routine borrowing through the RBI become front-page news? And where else are the media and the public told time and again that Kerala is in a debt trap, that every child born here carries ₹1.25 lakh in debt (while the corresponding per-capita burden of Union Government debt is conveniently left out).

KIIFB thus was an answer to this contemporary challenge: how to scale up infrastructure investment when budgetary borrowing is restricted. Let me make this clear. I hold no brief for governance or operational issues highlighted in the report. Lapses, if established, must be corrected. Revenue-generating projects should expand, and those able to pay for using public infrastructure should bear appropriate charges so that there is cash generation for repayment, not merely the motor vehicle tax and fuel cess.

But, both the White Paper and the latest report acknowledge KIIFB’s institutional capacity accretions for project appraisal, inspection and monitoring the use of funds. And people recognise that KIIFB has visibly improved infra in Government schools, bridges in rural areas and the State’s roads.

Can we not therefore agree on a KIIFB 2.0—discarding what does not work, retaining what does, and correcting the course through consensus? The combined expertise of experienced bureaucrats should help improve outcomes, not merely assign blame. In finance, hindsight is always 20/20. Pulling down the shutters is the laziest option.