CSES in Media

Is State Overborrowing from Markets?

This report on Kerala Budget 2021-22, which includes the comments of the CSES Senior Fellow, K.K. Krishnakumar, was published in The Times of India on16-01-2021

Finance minister TM Thomas Isaac’s budget speech reveals that the state government is planning to increasingly depend on financial market to raise additional resources to meet its deficit. Now the question is whether this is a sustainable route compared to raising further funds through taxation.

Kerala Infrastructure Investment Fund Board (KIIFB), the fundraising agency of the state government for infrastructure projects, had been borrowing from domestic as well as the overseas markets to fund governmental projects.

“This is following the annuity model, so the state government is actually giving guarantee to a corporate body like KIIFB and the government earmarks some funds from its own revenue for the repayment of KIIFB’s loans. And that will be one of the income sources for KIIFB in future. In future too, governments can decide which all items shall be included as the income sources for KIIFB.
Suppose the government wants to borrow more funds, then the government can include more sources of income or apportion more sources of income for KIIFB,” said senior fellow, Centre for Socio-Economic and Environmental Studies (CSES) KK Krishnakumar.

However, tax revenues of the state have dwindled due to the pandemic and it is not expected to return to normalcy until a few months, perhaps a year. Data show that during April-August 2020, the revenue receipts of Kerala came down to Rs 26,203 crore, a decline of nearly 24% from Rs 34,251 crore in the similar period, previous year.

Tax revenue of the state came down by 38% to touch Rs 16,504 crore and non-tax revenue came down by 82% from Rs 4,497 crore during April-August 2019 to Rs 794 crore in the similar period of 2020. Will this situation affect the repayment of its debt from the financial markets?

“For the time being it [KIIFB’s source for repayment] is part of the road tax on an incremental basis – 10% during first year and 20% during the second, and up to 50% within five years. After that, 50% of the road tax and petroleum cess will become one of the income sources for KIIFB. On the other hand, some of the projects KIIFB implemented have their own income. So that will be
another source of income for KIIFB. Hence, that [further borrowing from the financial markets] won’t be an issue,” Krishnakumar said.

It seems Isaac has immense faith in the powers of KIIFB as a fundraising arm. “KIIFB has accorded sanction for 821 projects worth Rs. 40,100 crore. In addition to this, Rs. 20,000 crore has been sanctioned for land acquisition of industrial parks and the like,” he said in his speech.