The latest State Finances Audit Report of the Comptroller and Auditor General of India, which was tabled in the Assembly on Thursday, has asked the Kerala government to include all the borrowings it makes on behalf of Kerala Infrastructure Investment Fund Board (KIIFB) in its annual Budget statement. Significantly, according to the report, the government has promised to consider the recommendation.
If accepted, the CAG's recommendation would question the very purpose of KIIFB, and the other off-budget vehicle formed by the LDF government to fund Kerala's various welfare pensions, Kerala Social Security Pension Limited (KSSPL). Both KIIFB and KSSPL were constituted primarily to bypass the Fiscal Responsibility and Budget Management (FRBM) Act, which does not allow state deficits to balloon beyond a limit, and also the severe limits on state borrowings imposed by the Centre. Such an off-budget route was explored because more than 80% of Kerala's borrowings went into meeting its salary, pension and interest commitments.
KIIFB or KSSPL's debts were not included in the annual Budget, and therefore did not show up in the official revenue and fiscal deficit figures of Kerala, and also in the state's usual annual borrowing. The CAG has now said that this is, essentially, absurd.
Therefore, the CAG wants KIIFB and KSSPL's annual borrowings to be included in the Budget calculations. For instance, it was Rs 1930.04 crore for KIIFB and Rs 6843.65 crore for KSSPL during the 2019-20 fiscal.
This would mean that the money KIIFB borrows for big infrastructure projects and KSSPL for social security needs annually would be added to Kerala's usual annual borrowings.
By law, a state can borrow only within a fixed limit; normally, 3% of the gross state domestic product. If KIIFB and KSSPL's debts are clubbed with other budgetary debts, either KIIFB/KSSPL will have to cut down their annual borrowing or Kerala will have to forego a portion of its annual open market borrowings to keep within the borrowing limit.
The CAG had already flagged this issue in its last State Finances Report, which was tabled on January 18 this year. The report, which even termed KIIFB's 'masala bond' unconstitutional saying only the Centre could borrow from external sources, was vehemently opposed by the then finance minister, T M Thomas Isaac. Isaac had then argued that KIIFB was a "body corporate" and not a 'state' and, therefore, could fetch money from external sources like the London Stock Exchange.
Though the former CAG report had only harsh things to say about KIIFB, it had stopped short of passing any strictures. The latest report has. It has directed Kerala to cease considering KIIFB loans as off-budget borrowings.
It rejected the government's contention that KIIFB's loans are contingent liabilities. A liability is considered contingent only if the government has to step in to repay as a last resort when something unforeseen happens. The CAG has consistently maintained that only the debts of public sector units or autonomous bodies that have their own sources of income could be considered contingent. Such liabilities fall on the government only rarely.
In KIIFB's case, the government has to step in all the time. "KIIFB has no revenue of its own and the state government has to defray the debt obligations of KIIFB by transferring its own revenue resources on a regular basis through the state budget," the latest CAG report said. However, the government has argued that at least 25% of its projects were income-generating.
The CAG also found "untenable" the state government's contention that the records and statements of KIIFB are laid before the Legislature and, therefore, has legislative approval. "The borrowings and expenditure of KIIFB are not included in the state budget documents for the vote of the legislature," the report said.
In both the cases (KIIFB and KSSPL), the report noted that their borrowings were ultimately the liability of the state government. "Moreover, these off-budget borrowings by the State Government have the effect of bypassing the net Borrowing Ceiling (NBC) of the state by routing loans outside state budget. Such borrowings naturally have impact on the revenue and fiscal deficit, and thus have the effect of surpassing the targets set for fiscal indicators under the FRBM Act," the report said.
If, for instance, the borrowing of Rs 1930 crore (KIIFB) and Rs 6844 crore (KSSPL) were included in the 2019-20 budget accounts, the revenue and fiscal deficit for that fiscal would have been far higher than the recorded 1.70% and 2.79%.
However, the government does not consider KIIFB's borrowings as debt. The KIIFB CEO himself had told the CAG that the annual money set apart for KIIFB from the budget (50% of the motor vehicle tax and the whole of th epetrol cess) alone was necessary to pay off KIIFB's debts, which approximately would cross Rs one lakh crore by 2031-32. As it stands, KIIFB would take up big ticket projects worth nearly Rs 65,000 crore.
