Budget in focus: Growing debt has brought Kerala to brink of a mega crisis

There is growing resentment over the Kerala government's inability to pay salaries and welfare pensions on time.

ByK A Shaji

Published Jan 14, 2023 | 10:29 AMUpdated Jan 14, 2023 | 7:37 PM

Farm workers at a paddy field in Kerala's Alappuzha district. Financial crisis budget

It was in July that Finance Minister KN Balagopal, during a discussion in the Assembly, accused the Union Finance Ministry of landing Kerala in a severe financial crisis by withholding a whopping ₹23,000 crore in resources due to the state, while also curbing its fiscal powers.

Balagopal then went on to give a break-up for the shocking amount.

The Centre, he contended, had reduced the revenue deficit grant of the state by about ₹7,000 crore this fiscal. The end of the GST compensation from July, Balagopal went on, would cost the state another ₹12,000. And, because of the “off-budget borrowings” made by Kerala, the Union Finance Ministry had cut the state’s net borrowing limits by roughly ₹4,000 crore.

That made for a total of ₹23,000 crore.

Six months down the line, with the state staring at a looming financial crisis just a few days ahead of budget presentation, Balagopal continues to harp on the “Centre’s step-motherly attitude to Kerala”, but some of his earlier claims have proven to be terminological inexactitudes.

Fudging the numbers

KN Balagopal, Finance Minister of Kerala (Supplied).

KN Balagopal, Finance Minister of Kerala (Supplied).

It is now evident that the numbers Balagopal was bandying about, especially on GST compensation, were far from accurate.

The minister himself now says that the compensation due is a meagre ₹780 crore. And replying to Thiruvananthapuram MP Shashi Tharoor, Union Finance Minister Nirmala Sitharaman said in the Lok Sabha that the amount would be paid to Kerala as soon as the GST audit is published.

Its release would not, however, make any great impact on the poor finances of the state.

Economists and financial experts cite the GST dues fiasco as yet another example of the ruling LDF government making tall claims about its finances without doing any homework or attempting any reality check.

With loans and overdrafts worth some ₹3.35 lakh crore, the Pinarayi Vijayan-led government is in deep debt, and failing to find any new source of finances.

Related: Experts see few options as Kerala heads for an economic crisis

What economists say

According to noted economist Mary George, Kerala’s debt has increased 13-fold in the past 25 years. Moreover, she estimates that this figure would cross ₹4 lakh crore by the time the second Pinarayi Vijayan government completes its term.

That the government is in a financial bind is quite evident from the deferred distribution of salaries and pensions of its employees, as well as delays in social security assistance to the needy.

In addition to the accumulated debt, the state is also facing the heat in terms of the Centre’s decision to enforce cuts in the monies it gives to Kerala under various heads.

This came after the latest report of the Comptroller and Auditor General (CAG) found the state resorted to large-scale off-budget borrowings, or OBBs, in recent months through agencies like the Kerala Infrastructure Investment Fund Board (KIIFB) and Kerala Social Security Pension Ltd (KSSPL).

Jose Sebastian, an economist with the Gulati Institute of Finance and Taxation, told South First that the options before the state to avert or survive the current crisis are practically nil.

The state has borrowed so much money already from all possible sources, said Sebastian, that the crisis is already visible and will turn acute in the first quarter of the upcoming fiscal year.

Of course, there is an element of politics in all this.

Sebastian believes that the chances of the BJP-ruled Centre enhancing the net borrowing ceiling (NBC) of the Left-ruled state are slim.

Related: Alarming drop in tourist arrivals adds to Kerala’s fiscal woes

Crisis impacts LDF popularity

What is worrying for the LDF is that the acute financial crisis, which is impacting governance, is now being reflected in the growing resentment against the regime, with people picking even minor, but perhaps avoidable, spending and holding it up as examples of profligacy.

The latest among them is the controversial move to give a salary hike to the state’s Youth Commission chairperson Chintha Jerome, a  young woman leader of CPI(M) — and that too with retrospective effect.

Similarly, a cow shed at the chief minister’s official residence recently created headlines in the Malayalam media which tom-tommed the fact that it had cost the exchequer ₹40 lakh.

The government, which claims to have embarked on strong austerity measures, installed an elevator at Vijayan’s residence at a cost of ₹25 lakh, and also bought him a new car worth ₹30 lakh.

In the last seven years, ₹30 lakh was spent on maintaining the swimming pool at Vijayan’s residence, an RTI query confirmed.

The government has also spent several crores on top lawyers of the Supreme Court to defend CPI(M) leaders and cadres who figured in criminal cases, including the murder of political opponents.

In the meantime, state Chief Secretary VP Joy has issued a directive to all departments to cut expenses and keep away from extravaganzas.

Related: Chintha Jerome in crosshairs of trolls for her salary

Budget 2023-24

The budget for the financial year 2023-24 is expected to be presented in the Assembly on 27 January. The government, which won the public mandate by promising to increase social security and welfare pensions to ₹3,000, is unlikely to take any step in that direction for lack of funds.

At present, the monthly pension is ₹1,600. The government requires ₹770 crore to provide welfare pensions to 50.48 lakh beneficiaries in the next fiscal year.

The government is unlikely to announce any major infrastructural or development programmes in the budget.

In the face of the “unprecedented financial crisis”, the government has written to Prime Minister Narendra Modi requesting to exclude debts incurred by autonomous bodies of the state, like the KIIFB, from the annual borrowing limits to facilitate more borrowings.

Chief Minister Pinarayi Vijayan with Prime Minister Narendra Modi in New Delhi on Tuesday, 26 December. (Supplied)

Chief Minister Pinarayi Vijayan with Prime Minister Narendra Modi in New Delhi on Tuesday, 26 December. (Supplied)

The chief minister is expected to seek a meeting with Modi to urge the Centre to relent on this front.

Until 2017, only the states’ borrowings made through the Reserve Bank of India (RBI) were considered public debt. However, the Union government brought in a new provision five years ago stipulating that the loans and other borrowings by state PSUs, corporations, and special purpose vehicles be included in the state budget as borrowings by the government.

In addition, the whole amount would be considered the public debt of the particular state. The amendment was made in accordance with Article 293 (3) of the Constitution, which reinforces the Centre’s authority over states’ borrowings.

The Centre implemented the amended provision only from the current fiscal year.

In its letter, Kerala has requested the Centre to hike the revenue deficit grants, apart from the stipulated share of the central tax revenue due to the State, other than restoring the GST compensation.

“The combining of the debt of statutory boards and companies with that of the state is contrary to the provisions of federalism, and the same will imperil the borrowing capacity of the state,” the government observed in the letter.

Poor fiscal management

According to BA Prakash, a member of the 5th Finance Commission, poor financial management has contributed significantly to the present crisis. The government, he said, had focused more on extravaganzas than resource mobilisation. He also pointed out that borrowing became the government’s sole revenue generation mode.

In the current fiscal, Kerala has spent ₹72,484 crore on salaries and pensions alone.

When it came to power in 2016, the LDF had blamed the previous Congress-led UDF government of poor financial management. A white paper was issued on the poor financial perception of the then government under which debt had increased.

The promise of LDF to cut expenses and avoid unnecessary expenses has failed to materialise.

Now, the UDF plans to release a similar white paper on the state economy in the six years of Pinarayi Vijayan’s rule.