Centre cuts Kerala's last quarter borrowing by 80 per cent

Stingy Centre cuts Kerala's borrowing by 80 per cent
Finance Minister Thomas Isaac

After inflicting a severe blow in the form of denying flood relief to Kerala, the Centre has struck again. It has now seriously weakened Kerala's capacity to borrow from the open market.

Finance Minister T M Thomas Isaac said the Centre had, without warning and without giving any reasons, slashed Rs 3,000 crore from its borrowing limit for the last quarter of the 2019-20 fiscal. “As a result we can borrow only Rs 1,900 crore during the last quarter of this fiscal,” Isaac told reporters here on Thursday.

The minister said this would mess up the state's fiscal management. “Except for welfare support like farmers' subsidy, medical expenses for poor and students' scholarships, other major government expenditure will have to be rescheduled based on the availability of funds,” Isaac said. Salaries could probably be late. Isaac, however, did not comment on this.

Local bodies will find it even harder to get their bills cleared. Already, plan funds have been cut by 30 per cent. Now there is fear that it could be subjected to further cuts.

Contractors' woes

The sudden cash crunch will also hurt accredited government contractors who were promised payment in the first week of January. Their payment will now be pushed to the last week of January, and because the Treasury is dried of cash this will be done using a new system called 'bill discounting'.

Under this system, the contractors will be paid by banks. In turn, banks will consider these payments as loans to the government. But what makes the system problematic is its forbidding condition: half the interest will have to be borne by the contractors. It is still not clear whether contractors would approve of the arrangement.

Deprivation, in phases

As per statute, a state can borrow up to 3 per cent of its GDP. Thus, when the 2019-20 Budget was prepared, the understanding was that Kerala could borrow Rs 24,915 crore during the fiscal. Of this, Rs 10,233 crore was scheduled for the last quarter. It is this that has now been pared down to Rs 1,900 crore, a fall of over 80 per cent.

“By the middle of the fiscal, the Centre had informed that Rs 5,325 crore would be cut from the last quarter's borrowing limit. This still meant that we could borrow Rs 4,908 crore. Yesterday evening we received a communication saying Rs 3000 crore had been taken out of this, leaving us with only Rs 1,900 crore,” the finance minister said.

Curse of a rich treasury

According to Isaac, the Centre has a strange reason to effect a cut in Kerala's borrowing limit. “They say that Kerala's Treasury deposits in 2016-17 had shown an increase of Rs 6,000 crore over what was shown in the Budget. They had considered it as loan,” Isaac said.

“Fact is, a substantial chunk of this is unspent money kept as Treasury deposits by various departments. It also included the salaries and pensions kept as deposits in the Treasury. How can deposits be considered loans,” Isaac said.

Isaac also found it amusing that the BJP government was using 2016-17 figures to curtail borrowing three years later.

Rs 8,000cr loss

The finance minister estimated that, including the drastic cut in borrowing limit, Kerala would stand to lose Rs 8,330 crore it was entitled to from the Centre during the last fiscal. He was referring to the GST compensation the Centre was refusing to pay the state, and the state's share from the Centre's divisible pool. “The GST compensation would come to around Rs 1,600 crore,” he said.

Isaac fears the state's share from the Centre's divisible pool, too, will come down. “Last fiscal, during the last quarter, we had received as the state's share Rs 6,866 crore. There are indications that this fiscal it would be only Rs 4,524 crore,” Isaac said.

Further, he said the Centre had not paid up Kerala's arrears related to Centrally Sponsored Schemes. For the MGNREGA scheme, Kerala has run up arrears of Rs 1,215 crore. The Centre has still not passed on the Rs 1,035 crore Kerala had used to procure rice.

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