CAG adds 'masala' to Assembly proceedings, calls KIIFB loans unconstitutional

CAG adds 'masala' to Assembly proceedings, calls KIIFB loans unconstitutional

Thiruvananthapuram: The State Finance Audit Report of the Comptroller and Auditor General Report, against which Kerala Finance Minister T M Thomas Isaac had whipped up a storm late last year, was tabled in the Assembly on Monday. And for the first time in history, a CAG report was tabled along with the minister's damning observations.

It was a three-and-a-quarter page portion in the CAG report, a small section titled 'Off-budget borrowings' within the chapter 'Finances of the State Government', that has enraged the finance minister. This section is highly critical of Kerala Infrastructure Investment Fund Board's (KIIFB's) borrowings, it terms them even unconstitutional.

Isaac said the CAG had inserted the section without giving the KIIFB and the government to explain its stand. He said that the country's audit regulations mandate that a state government should be given an opportunity to give its side before any comment or observation or explanation was included in a report. He said the observations on KIIFB was not in the draft report sent to the government nor were they discussed during the exit meeting of CAG and government officials.

The CAG has not responded to Isaac's charges.

Nonetheless, the CAG observations on KIIFB are scathing. It says that KIIFB borrowings have no legislative approval and also violates constitutional provisions.

"It is observed that the maximum amount of borrowings is done from 'masala' bonds, which are, by their very nature, external commercial borrowings," the CAG report said. The report said that the Constitution bestows the power to raise foreign loans only on the central government.

"The entire repayment is being done through government's (Kerala's) own resources and therefore, such foreign borrowings are, for all practical purposes, borrowings of the state government. Hence, they appear to be in violation of the provisions of the Indian Constitution and encroachment of the state on the powers of the centre," the CAG report said.

The CAG also pulls up the RBI for granting approval to the state to float 'masala' bonds. The report says the apex bank's move is questionable because if this model of sourcing foreign funds were to be adopted by other states, "then the external liabilities of the country would increase substantially."

Isaac had argued that KIIFB's borrowings were at the most contingent liability for the state. In other words, the state needs to pitch only in the event of KIIFB defaulting.

The CAG report argues that the borrowings of public sector undertakings (PSUs) and autonomous bodies (ABs) are considered contingent liabilities for the state because these PSUs and ABs are expected to repay from the income they generate on their own.

In the case of KIIFB, it depends on flow of funds from the government, petrol cess and motor vehicle tax, to meet its obligations. "Such liability is fully the liability of the state. In other words, if the resources of the PSU/AB are to come from revenue raised by the government by way of taxes and ceases, and the PSU/AB has no income of its own, then there is nothing contingent about the liability," the CAG report says.

The CAG said the KIIFB borrowings should be added to the fiscal deficit of the State. Now, it is not not included in the deficit calculations.

Further, the CAG says KIIFB'S borrowings should keep within the debt ceiling prescribed for Kerala, which is 3 percent of the state's GDP.

If Kerala is forced to follow this CAG diktat, Isaac had earlier said that it would be the end of the KIIFB experiment.

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