Why did Nirmala Sitharaman refuse to shut down off-budget entities like KIIFB

The Union government has a serious problem with the off-budget borrowings of Kerala, especially through Kerala Infrastructure Investment Fund Board (KIIFB) and Kerala Social Security Pension Limited (KSSPL).

The Centre finds this practice so reckless that it has for the last four years, attempted to forcibly instill fiscal discipline by subtracting from Kerala's statutory annual open market borrowing limit (3% of GSDP) the exact amount that KIIFB and KSSPL borrow each year; in this 2025-26 fiscal, the deduction was ₹5900 crore.

Nevertheless, the Centre has sprung a surprise. It has refused to endorse the 16th Finance Commission (16th FC) recommendation that called for either an end to all off-budget activities like KIIFB and KSSPL or the inclusion of all their debts, spending and receipts within a state's Budget.

The Union government, which has accepted most of the 16th FC's recommendations, shied away from taking a decision on this. Union Finance Minister Nirmala Sitharaman, in the 'Explanatory Memorandum' on the Action Taken on the 16th FC recommendations, said "it will be examined separately".

If the recommendation was accepted, Kerala would have been forced to include the debts of KIIFB and KSSPL in its Budget figures from the next fiscal on. The result would have been a far more bloated fiscal deficit figure.

Already, without factoring in the debts of off-budget entities, Kerala's fiscal deficit for the ongoing 2025-26 fiscal is 3.78 per cent, a mismatch that is far wider than the ceiling of 3 per cent imposed for the fiscal by fiscal responsibility legislations.

On the face of it, the Union Finance Ministry's move to sidestep the off-budget issue is puzzling. Primarily because it has repeatedly ranted against the off-budget borrowings of Kerala and had even imposed punitive measures against Kerala like squeezing its open market borrowing space.

The Centre had nothing to lose either. Even if it had accepted the recommendation, the Centre would not have been subjected to additional fiscal stress for two reasons. One, it had done away with the off-budget practice in 2022‑23. And two, even when it did resort to extra budgetary resources, the Centre had disclosed the accounts in the Union Budget.

The 16th FC, in fact, spoke the Centre's stern language. "Off‑budget borrowings pose a risk to fiscal stability, as it can become a vehicle for borrowing in excess of the prescribed limits," the report said. Alluding to the KIIFB model, the 16th FC said that "practices such as not crediting government revenues to the consolidated fund but instead escrowing them directly could also be unconstitutional under Article 266".

"We recommend that, building on the example set by the Union Government, States should completely discontinue this practice and bring all off‑budget borrowings into their budgets," the 16th FC said in its report.

So if the Centre still let Kerala and KIIFB off the hook, top sources in the Finance Department say that it was only because the recommendation would have hurt friendly states like Andhra Pradesh, which had considerably higher off-budget debts.

Andhra Pradesh's off-budget borrowings for its power distribution companies at the end of the 2022-23 fiscal is ₹26,466 crore, and for its civil supplies corporation is ₹35,100 crore. Together, AP's off-budget borrowing is a monumental ₹61,566 crore. In this place, Kerala's borrowing for KSSPL is just ₹11,733 crore.

Andhra Pradesh also funds its off-budget borrowing just the way Kerala funds KIIFB. If Kerala transfers 50 per cent of its motor vehicle tax and the whole of petrol cess to the KIIFB annually, AP diverts its additional retail excise tax (ARET) to Andhra Pradesh State Development Corporation Limited, which like KSSPL functions as the link between the state and welfare beneficiaries.

"If KIIFB is touched, the Centre cannot spare ARET. If this happens, Modi cannot expect Chandrababu Naidu to remain silent," a top Finance Department source said.

By now, KIIFB has approved 1,205 projects worth ₹76,486.57 crore. Total funds disbursed by KIIFB from its inception in 2017 till December 31, 2025, is ₹38,293 crore. As it stands, KIIFB has ₹63,659 crore in its kitty; ₹25,738 crore it has received as contribution from the government of Kerala and the remaining ₹37,921 crore it has mobilised from the financial market.