Thiruvananthapuram: The Comptroller Auditor General - Kerala Government tit for tat on KIIFB loans seems never ending. The CAG says it is intensifying fiscal stress and the government, in turn, keeps insisting that it will not.

However, the latest CAG report on State Finances 2023-24, tabled in the Assembly on Thursday, even while warning about KIIFB's "off-budget liabilities", reveals that Kerala's debt, inclusive of KIIFB borrowings, is becoming sustainable with every passing fiscal.

In the 'executive summary', the CAG report paints a grim picture. "Going by the analysis and results, the finances of the state of Kerala are marked by an increasing trend of liabilities (debt, off-budget borrowings, etc.) which pose a risk to the target of debt stabilisation and debt sustainability."

But the fine print of the report sketches an encouraging profile of the state's debt. The overall liabilities of the state - including the public debt, public account liabilities and off-budget borrowings - was 41.35 per cent of the GSDP in 2020-21. This was when the CAG said Kerala's debt, loaded with off-budget loans of entities like KIIFB, was becoming unsustainable.

Ever since the debt load had lessened, marginally in the subsequent two fiscals: 39.72 in 2021-22 and 39.08 in 2022-23. In 2023-24, the latest figures with the CAG, the burden has dropped to 37.84 per cent of the GSDP. Instead of attending, debt has slimmed.

What Domar says
Even when the Domar Criteria, the globally accepted measure of debt sustainability, is applied, Kerala is shown to be in a safe zone. The Domar model says that the debt-GDP ratio will be stable if the rate of growth of the economy exceeds the rate of interest on the debt. If the Domar gap, or the difference between growth and interest, is more than one, it indicates debt sustainability.

Kerala's real growth, after the massive surge in the fiscal (2021-22) right after the Covid-induced coma years of 2019-20 and 2020-21, has shown a steady increase. If it was 4.24 per cent in 2022-23, it was 6.62 per cent in 2023-24.

The 'real effective rate of interest' is the difference between the 'effective rate of interest' and inflation. It was 1.47 per cent in 2022-23 and 2.30 per cent in 2023-24. The increase in interest rate was more than offset by the GSDP growth.

The Domar gap (the difference between real growth and the real effective rate of interest) consequently ballooned from 2.77 to 4.22. In short, Kerala's debt is becoming increasingly sustainable.

War of words continue
Though Kerala's debt has become sustainable, the CAG in its latest report persisted with the charge it had been making since 2019: loans taken by Kerala Infrastructure Investment Fund Board (KIIFB) and Kerala Social Security Pension Limited (KSSPL) are direct liabilities of the state and, therefore, are off-budget borrowings.

And the government, as has become the norm, argued to the contrary in a separate dissent note.

"The Audit report reiterates observations that were rejected by the PAC (Public Affairs Committee) and the state Assembly with regard to the borrowings of the KIIFB," the dissent note, which was tabled along with the CAG report, said.

"As was made clear during the discussions in the Assembly on the State Finance Audit Report for 2019, the borrowings of KIIFB are on the basis of government guarantees and are therefore not direct liabilities of the state but only contingent liabilities, particularly since KIIFB also funds remunerative projects and generates its own income as well," it said.

The dissent also rejected the CAG's description of KSSPL as an off-budget liability. "In actual fact, the borrowings of KSSPL are only for the purpose of managing the liquidity of the state and for ensuring that welfare pensions to over 60 lakh beneficiaries in the state are not delayed due to any cash management issues. Most of these amounts are repaid during the course of the year," the dissent said.

Further, it also said that if Kerala's poverty was kept below one per cent it was because of the broad social safety net that Kerala could sustain with the help of the KSSPL.

Changing face of KIIFB
Right from 2019, the CAG had been arguing that the KIIFB had no revenue-earning projects like the National Highways Authority of India, a special purpose vehicle whose loans are not included in the union budget.

Though Kerala had argued that 25 per cent of KIIFB projects are revenue-earning, the relentless pressure applied by the CAG seems to have worked. This February, Chief Minister Pinarayi Vijayan said "user fee" would be imposed on KIIFB projects to reduce its dependence on the budget.

Besides the CAG's uncompromising stand, the KIIFB has also been impacted by a 2024 RBI circular that has asked public sector banks to refrain from funding projects for which the repayment is done by governments from their budgets.

KIIFB is annually nourished by flows from the Kerala budget; 50% of the annual motor vehicle tax and the petrol cess in its entirety (Rs 3500 on average annually). After the RBI circular, this state support is reason enough for some of the KIIFB's biggest lenders like SBI, Canara Bank, and NABARD, to ditch the Board. More reason for KIIFB to disengage its activities from the budget.

How the CAG will respond to a more independent KIIFB will be revealed only in future CAG reports.