Kerala: Experts see few options as state inches towards a severe economic crisis

Finance Minister holds Centre responsible for crisis, but hopes it will 'decide in our favour'. Others are not as hopeful.

ByK A Shaji

Published Jul 26, 2022 | 12:05 PMUpdatedJul 26, 2022 | 1:24 PM

Kerala Supreme Court: Kerala's Finance Minister K N Balagopal criticised the Budget, saying that the long-pending demands of the southern state were completely ignored. (South First)

In the state Assembly last week, Kerala Finance Minister KN Balagopal was at his aggressive best.

He blamed the Narendra Modi-led Centre for the state’s financial woes, accusing it of curtailing Kerala’s fiscal powers and adopting a step-motherly attitude towards it — leading to a gaping ₹23,000 crore hole in its finances.

Despite the best efforts of the state cabinet, he thundered, the Union Finance Ministry was unwilling to pay GST dues or go back on its decision to impose cuts on central assistance to the state. Mention was also made of the use of central agencies like the Comptroller and Auditor General (CAG), Enforcement Directorate (ED), and the Income Tax department to intimidate the state.

On Monday, 25 July, when South First reached out to Balagopal, he was in a much mellower mood.

“Efforts are on to convince the Union Finance Ministry of the needs and aspirations of the state, and we are hopeful that the Centre will decide in our favour,” he said.

Others, however, are not as hopeful.

‘Grave financial emergency’

Financial experts, in fact, said the state is staring at a grave financial emergency, one that may lead to the deferred distribution of salaries and pensions of government employees, and delays in social security assistance to the needy.

As senior economist Mary George put it, the Centre has decided to enforce cuts on various assistances to the state after the latest report of the CAG found the state had indulged in large-scale off-budget borrowings (OBBs) in recent months through agencies like the Kerala Infrastructure Investment Fund Board (KIIFB) and Kerala Social Security Pension Ltd (KSSPL).

The state government must evolve short-term and long-term measures to address the impending crisis, George told South First. And it must try and be pragmatic, and ensure that the financial policies it evolves in the coming days are not in conflict with the Centre’s policies.

She, however, has no doubt that there is politics and intimidation involved in the BJP-led Centre’s dealing with opposition-ruled Kerala — a state where it has been vainly trying to make inroads — citing as example the ED summons to former finance minister TM Thomas Isaac over the open market borrowings of the LDF government using KIIFB.

The Centre has already cut ₹7,000 crore on fiscal deficit grant for the state and discontinued GST compensation worth ₹12,000 crore, Balagopal said. In addition, there will be a ₹3,578 crore reduction in the state’s borrowing capacity because the Union Finance Ministry has decided to consider the guarantees provided to KIIFB and KSSPL as debt. Also, Kerala’s borrowing limit has been brought down to 3.5 percent.

‘Crisis is already visible’

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 crisis were 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 second half of the fiscal year. Others believe it will hit as early as the days following the harvest festival of Onam, which kicks off in end-August.

The chances of the BJP-ruled Centre enhancing the net borrowing ceiling (NBC) of the Left-ruled state are slim, said Sebastian, especially given that the Union government practically created the crisis by adjusting OBB worth Rs 14,000 crore in the net borrowing ceiling of the state,

What is affected?

Apart from salaries and pensions, the looming crisis will engulf welfare schemes for the poor and the government’s focus areas like housing, education and healthcare.

The state government’s ambitious LIFE Mission housing scheme would be a significant casualty as it requires enormous capital flow.

The state is obliged to release three months’ welfare pension to 52.5 lakh beneficiaries just ahead of Onam. That alone would require ₹2,500 crore.

Balagopal said he would write a detailed letter soon to Union Finance Minister Nirmala Seetharaman, stressing the need to strengthen the federal financial structure and restore all financial help due to the state.

He would do well not to hold his breath awaiting an answer.