Thiruvananthapuram: Several Indian States have raised their voice against the Centre's move to impose severe restrictions on loans they could avail. The Government of Telangana even considered convening a session of the State Assembly to pass a resolution against the central move.
Kerala's Finance Minister, too, made the State's displeasure known at a news conference. Considering the precarious financial condition of the State, the Centre, however, has now allowed Kerala to borrow Rs 5,000 crore.
New Delhi's approval for borrowing Rs 5,000 crore will help the State to tide over the crisis temporarily. But it has to be noted that the Centre has not gone back on its decision to put curbs on borrowings. Once the Centre makes a final decision, and goes ahead with its plan, Kerala would be pushed into a deep financial crisis.
The crisis could affect the disbursement of employees salaries, besides adversely impacting the distribution of service and welfare pensions. Additionally, the State would be forced to cut short several projects announced in its Budget.
Treasuries would further tighten the purse strings, and most departments would put pressure on the finance department for funds. This might eventually lead to an administrative crisis.
Money trail
A fiscal deficit is a shortfall in a government's revenues compared with its spendings as announced in the Budget. The government will be compelled to borrow when the spendings overshoot its income.
The central government informs each State the amount they could borrow during each financial year. This is informed at the beginning of the fiscal itself.
Based on the Centre's intimation, each State is mandated to inform the Reserve Bank of India every quarter the amount they plan to raise through loans every week. The central bank prepares an indicative borrowing calendar.
The Reserve Bank notifies the amount each State wants to borrow and the repayment tenure every Friday, based on the borrowing calendar. Loans, issued as bonds, are granted through an auction conducted on the RBI's core banking solution, E-Kuber, every Tuesday.
Banks, and large institutions participate in the auction. Private individuals are also allowed. States are mostly granted loans at an interest rate of six to nine per cent.
Kerala model
Kerala can borrow up to 3.5 per cent of its Gross State Domestic Product (GSDP) during the current financial year. The GSDP has been pegged at about Rs 10 lakh crore, which allows it to borrow Rs 32,435 crore. The loan, granted by the Centre, is known as State Development Loan (SDL), meant to carry out development activities.
The State, however, spends about 75 per cent of the loan to disburse the salaries of government employees and to distribute service pension, and social welfare pensions to about 50 lakh people. The remaining amount will be required to meet the government's daily expenditure. In short, the SDL is not spent on development works.
The current crisis
Kerala had decided to borrow Rs 1,000 crore in April and Rs 5,000 crore in May, and the RBI prepared its calendar based on this plan. But the plan went for a toss after the Central Finance Secretary T V Somanathan wrote to the States, including Kerala, seeking the details of loans they had raised through public sector undertakings and other agencies.
Somanathan also warned of initiating disciplinary action against civil service officials if the States furnished wrong information. The warning has been seen as a deterrent to States from borrowing more by submitting wrong information.
The government stands guarantee to loans availed by most public sector undertakings, including Kerala Infrastructure Investment Fund Board (KIIFB). If the institutions default in repayment, the government (guarantor) will be responsible for repaying the loan. Hence, the Centre is considering loans availed by KIIFB, public sector undertakings, other semi-public sector institutions as those raised by the government.
The investment of individuals in treasuries and Kerala State Financial Enterprises (KSFE), too, are considered as loans availed by the government. The Centre has adopted a stand that such off-budget borrowings through institutions and agencies should be included in the States' annual borrowing limit. Central finance secretary Somanathan's demand for details was in this backdrop.
Kerala, meanwhile, has demanded the Centre not to include off-budget borrowings in the annual borrowing limit. The centre is yet to make a decision on the demand.
Central hurdle
Even the central government borrows to implement its development projects, and the Centre is not averse to States availing loans. However, borrowing beyond the repayment capabilities will push the States into debt traps.
The Fiscal Responsibility Budget and ManagementAct (FRBM Act) has been passed by the Centre and State to avoid such a debt trap. The Act ensures that the revenue and fiscal deficits, tax-GDP rates, and total debt are within the prescribed limits.
The FRBM Act, passed in 2003, was amended in 2017 and 2018 due to global recession. The Act also allows domestic borrowing through the Reserve Bank.
Impact on Kerala
According to the March 31 report by the Comptroller and Auditor General (CAG), the government of Kerala is the guarantor for loans availed by 36 public sector institutions, including KIIFB. The total liabilities of these institutions are Rs 31,800 crore.
The Centre may not include the entire liability in the State's annual borrowing limit. Kerala, however, will be in financial dire straits if even half of the liability is included in its limit of Rs 32,435 crore. The crisis will become more severe if the GST compensation, too, dries up next month.
Though the State Finance Minister has assured that the salaries of government employees will not be hit, the State might hold back part of the monthly pay and pensions, like it had done during the peak COVID-19 period.
Meanwhile, rumours from the Secretariat have it that the Finance Department officials had already recommended to hold back 30 per cent of salaries, and the government has been mulling over to slash it to 10 per cent. Sources close to the finance minister, however, dispelled the rumours saying it as mere political ploy ahead of the Thrikkakara by-election.
Who is right?
Several experts are of the opinion that the Centre should have considered the impact of the implementation of a sudden reform, which would derail the States' budgets, and create a period of financial insecurity. It is widely anticipated that the Centre will take into account the States' apprehensions before making a final decision.
The first Pinarayi Vijayan government, however, preferred to discard the CAG's criticism of the State's off-budget borrowings. Instead, the government politicised the criticism. The CAG had taken a stand that the borrowings by public sector institutions like KIIFB, too, should be included in the government's account. The Centre is now towing the CAG line.
It is certain that there will be strict restrictions on borrowings by other institutions even if the Centre now adopts a lenient stand. KIIFB has been carrying out about 75 per cent of the State's development works. Once all the borrowings are brought under one account, loans could be availed either by KIIFB or the government. It could also be the end of KIIFB, a special purpose vehicle floated to overcome the annual borrowing limit envisaged in the Budget.
Loans availed by other institutions on government's guarantee
(Amount in Rs crore)
KSFE: 12,974
Co-operative Agriculture and Rural Development Bank: 5,830
KSRTC: 3,178
Kerala Urban and Rural Development Finance Corporation: 3,054
Social security Pension Ltd: 1,773
Kochi Metro: 1,110
Backward Classes Development Corporation: 1,078
KTDFC: 832
KIIFB: 550
Women's Development Corporation: 394
Travancore Rayons: 345
Matsyafed: 168
Kerala Financial Corporation: 117
Handicapped Persons' Welfare Corporation: 62
Scheduled Castes and Scheduled Tribes Development Corporation: 47
Traco Cables: 47
Minorities Corporation: 40
Water Authority: 34
Coir Corporation: 28
Kollam Spinning Mills: 26
Kerala Electricals: 18
University of Advanced Legal Studies: 18
Khadi Village Industries Board: 15
Priyadarshini Spinning Mills: 10
Co-operative Consumer's Federation: 8
KSFC Staff Co-operative Society: 7
Kerala Automobiles: 5
Handicrafts Corporation: 5
Artisans' Corporation: 4
Rehabilitation Plantation Ltd: 4
Malappuram Spinning Mills: 2
Ninth in debt
(Amount in Rs lakh crore)
Uttar Pradesh: 6.29
Tamil Nadu: 5.88
Maharashtra: 5.26
West Bengal: 5.01
Rajasthan: 4.33
Karnataka: 3.96
Gujarat: 3.56
Andhra Pradesh: 3.36
Kerala: 3.29
Madhya Pradesh: 2.84
