The Comptroller and Auditor General has given Chief Minister V D Satheesan yet another reason to radically alter the structure of Kerala Infrastructure Investment Fund Board (KIIFB). The Chief Minister has already constituted an expert committee to revamp the funding entity.

The CAG Report on State Finances 2024-25, which was tabled in the Assembly on Tuesday, repudiated the previous LDF government's stand that the state guarantees extended to entities like KIIFB constitute contingent liabilities and not actual borrowing or debt of the state. Contingent liabilities are to be paid only when there is a default.

The LDF government had employed this argument to keep the borrowings of state-sponsored entities such as KIIFB and Kerala Social Security Pension Limited (KSSPL) outside the state's budget. The debts of these entities have never been included in the state's deficit calculations.

The CAG has dismissed the argument and spurned the practice. "The State Government’s argument that the borrowings made by KIIFB and KSSPL are contingent liabilities rather than debt of the State is not acceptable since the budgetary allocations of the State are being utilised by KIIFB and KSSPL for repaying these liabilities, as these entities do not have a sufficient revenue base for servicing their debts," the CAG report said.

Annually, half the motor vehicle tax and the entire petrol cess collection are transferred to KIIFB.

"As such, the debts of KIIFB are repaid by the resources from the Consolidated Fund of the State and therefore essentially represent the debt of the State," the CAG report said.

Article 266 of the Constitution says that all debts of a state are part of the Consolidated Fund of the State and, as per Article 202, the estimates of receipts of the State (including the debt receipts) require disclosure in the Annual Financial Statement/Budget. In other words, the Kerala government is constitutionally obliged to include KIIFB and KSSPL borrowings in its budget documents and factor them into deficit calculations.

Excluding KIIFB and KSSPL debts from Kerala's Budget creates the illusion of fiscal strength. In fact, Kerala's fiscal situation looks bad even without KIIFB debts. With them, as the CAG now insists, it will look worse.

Kerala's outstanding liabilities of ₹4,45,901.49 crore (35.71 per cent of GSDP) in 2024-25 were higher than the average for all States at 28.02 per cent. But if the outstanding off-budget borrowings of KIIFB and KSSPL (₹39,230.33 crore) are included, liabilities will fatten to 38.86 per cent of GSDP. 

The debts of KIIFB and KSSPL, though technically raised and accounted for in the books of these entities, are, in essence, repaid by the State from its Consolidated Fund. 

It is in the Consolidated Fund that all revenues received by the State Government, all loans raised by the State Government, ways and means advances extended by the Reserve Bank of India and all money received by the State Government are collected. 

The CAG noted that a Government of India communication on March 30, 2024, fixing the Annual Borrowing Ceiling for the 2024-25 fiscal year had specifically stated that borrowings by State Public Sector companies, 

Special Purpose Vehicles and other equivalent instruments, "where principal and/or interest are serviced out of State Budget and/or by assignment of taxes/cess or any other State’s revenue as Off-Budget borrowings".

"Therefore, contention of the State Government that borrowing of KIIFB is not Off-Budget borrowing is not tenable. Besides, the argument that KIIFB’s borrowings are guaranteed by the government does not take away the ‘Off-Budget’ nature of the borrowings and activities of the entity," the CAG report said.

The CAG also found that the state government had concealed a substantial chunk of KIIFB's annual borrowings from the Centre. This masking of actual borrowing was clearly an attempt to prevent a sizable reduction in Kerala's annual borrowing limit. In the last five years, the centre has been deducting KIIFB and KSSPL borrowings from Kerala's annual borrowing limit.

For instance, at the start of 2024-25, the state had intimated the Centre that there would be zero borrowing for KIIFB that fiscal. As it turned out, KIIFB borrowed ₹8,089.92 crore. In the case of KSSPL, the state had intimated the Centre of an estimated borrowing of ₹2,500 crore for 2024-25. However, the pension entity ended up borrowing ₹5,563.09 crore. Together, borrowings of ₹13,653 crore were hidden from the Centre.

The CAG asserted that "the State Government has to provide the details of borrowings by State Public Sector Companies/Corporations, Special Purpose Vehicles (SPVs) and other equivalent instruments, where principal and/or interest are to be serviced out of the State Budgets and/ or assignment of taxes/cess collection of any other State’s revenue to Government of India for obtaining consent for raising open market borrowing".