With questions being asked over the sustainability of the famed ‘Kerala model’ of social development in the absence of corresponding growth in the productive sectors of the economy, the Left Front government has set in motion a new experiment.
A brainchild of Finance Minister Thomas Isaac, the new initiative seeks to raise funds outside of state budget to finance infrastructure projects. The funds will be mobilised and channelised to various government agencies by a special purpose vehicle (SPV) called Kerala Infrastructure Investment Fund Board (KIIFB).
Its main source of the fund is general obligation bonds against unconditional government guarantee and revenue bonds with structured payment mechanism to be issued by the state government. An additional source is the profit from an exclusive chit fund that the government will be introducing for Non-Resident Keralites (NRK) from April this year.
The government will give the proceeds from the petrol and vehicle cess it introduced in 2015 to KIIFB to meet the repayment obligations. The agency has been given a tall target of mobilising Rs 1 lakh crore for financing infrastructure projects.
The agency has already received project proposals worth Rs 54,000 crore. Out of these, projects to the tune of Rs 17.28 crore are under various stages of approval. The finance minister has declared a moratorium on new proposals. Instead, he has passed on almost all new projects and schemes he has announced in his budget for 2018-19 to KIIFB.
This includes a Rs 3,500 crore scheme for the revival of the perennially red Kerala State Road Transport Corporation (KSRTC) and a Rs 2,500 crore scheme for building houses for the homeless. This has helped Isaac to get the revenue deficit below the last year’s level.
If all the projects materialise as envisaged by the finance minister, KIIB will have to find Rs 1 lakh crore over a period of 10 years to repay the debt at nine percent interest. The government will have to provide the fund since no return is expected from the projects to be financed by the KIIFB.
The bulk of the projects sanctioned by the agency so far is upgradation of schools, colleges and hospitals and construction of rural roads, which do not generate any revenue unless the government introduces fees and tolls. The government has no such plan. This means the government will have to provide the required funds to KIIFB from state exchequer as a government grant.
Isaac, a trained economist, is confident that the government will meet its obligations. But economists and opposition parties are not impressed since the state is already grappling with an outstanding liability of Rs 2.40 lakh crore and debts to the tune of Rs 1.37 lakh crore. The debt is bound to go up in the coming years since the state is virtually living hand to mouth.
With the salaries and pensions alone accounting for more than 70 percent of the state’s annual revenue, the state government is left with no money to meet even the non-plan expenditure. The gap between revenue receipts and expenditure has been widening over the years.
While expenditure increased by 22 percent in the current year, revenue went up by only 7.6 percent. The current financial year will close with a deficit of Rs 13,080 crore. The revenue estimated for 2018-19 is Rs 1,02,801 crore as against the estimated expenditure of Rs 1,15,661.05 crore. In spite of passing the burden on the new projects to KIIBF, the deficit for 2018-19 is estimated to be Rs 12,859.81 crore.
The government has earmarked the cess on petrol, diesel and vehicles for KIIFB, but the proceeds from it are meagre. This yielded only Rs 629 crore in 2016-17. The yield in the current year is expected to be Rs 1,042 crore. This will not be sufficient even to pay the interest on the debt fund to be mobilised by KIIFB.
VK Vijayakumar, a chief investment strategist, termed KIIFB is a big gamble, which has a high probability for failure. He feels that the new growth strategy can backfire and land the state in a serious fiscal crisis if the government is unable to raise funds for the debt repayment.
"No one will object to infrastructure investment through borrowings. But, the problem with KIIFB-led growth strategy is that part of the borrowed money is to be spent on projects that will not yield revenue, like housing for the poor," Vijayakumar said in an article in the Deccan Chronicle.
He pointed out that KIIFB itself had a pathetic performance in the last two years, with targets for fund mobilisation and expenditure falling short by a huge margin. Revenue expectations from higher growth are too optimistic particularly in the context of falling West Asian remittances impacting growth, he added.
Vijayakumar strongly feels that the state should focus on attracting investments as it lags far behind other states. The state’s future economic growth should be private investment-led growth, he said.
“Unfortunately, the budget talks about more investment in PSUs. Kerala has 96 PSUs under different departments, with accumulated losses of Rs 13,969 crore till 2016. Pouring more money into these black holes, as the budget attempts to do, doesn’t make economic sense,” Vijayakumar said.
Opposition leaders have termed the budget as a KIIB-led exercise. State Congress vice-president and MLA VD Satheesan said Isaac had used the agency to free the government from its responsibility to steer the development.
“Isaac has reduced the budget as a mere accounting exercise by passing the burden of implementing the projects and schemes to KIIFB. He also had nothing to do with the tax as GST will take care of it. With the exclusion of tax and development activities, what Isaac presented on Friday cannot be termed a budget," Satheesan said.
But what is worrying the opposition parties is the lack of accountability of KIIFB. Kerala Congress(M) leader and former finance minister KM Mani said the funds the agency mobilises and spends will be outside the purview of the Assembly.
Adikesavan, a banker, said that the finance minister could have tabled a report on KIIFB and fund it collects and spends separately as part of the budget to silence the sceptics. He said this was important since KIIFB is emerging as an alternative pole of the government’s strategy for development.
He said that the new model was unavoidable since the Fiscal Responsibility and Budget Management Act had placed restrictions on fiscal deficits. This has left little room for the states to borrow funds from the market.
Isaac justified the new model saying that the Central government had prevented the state from borrowing for three months last year. He termed KIIFB as a financial innovation to bypass the Central Act.
“When borrowing is stopped, we have to borrow through special institutions outside the budget. If the government waits for its own funds for the development, it will take years. For the young generation, it is better these developments happen now. We cannot sit idle and bid the time,” Isaac said.
Updated Date: Feb 03, 2018 20:48 PM