Kerala’s travails with soaring public debt continue

“Irrespective of who rules the state, the debt will double” is how Kerala Finance Minister Thomas Isaac put it on the floor of the legislature recently while referring to the state’s public debt that has doubled almost every five years. For instance, from ₹ 26,259 crore to ₹ 47,883 crore by end-March, 2006: ₹ 83,963 crore in end-March, 2011; and ₹ 1,62,272 crore by end-March 2016.

“It would not be a surprise if the debt should breach the ₹3- lakh crore by end-March this year. As sobering a thought abounding with far-reaching implications for the economy, this does not seem to have set off the alarm bells ringing just yet,” says Jose Sebastian, public finance expert and former faculty at think-tank Gulati Institute of Finance and Taxation, Thiruvananthapuram.

FRBM targets not met

Conventional public finance theory holds that borrowed funds should be used for creation of productive assets so that the debt self-liquidates through better tax and non-tax revenue realisation. But an analysis of the debt incurred by the state during the last 20 years shows that as much as 67 per cent has been used to defray revenue expenditure items such as salary, pension and interest payments.

States’ deficits matter, too

The Fiscal Responsibility and Budget Management (FRBM) Act of 2003 mandated both the Centre and states to rein in revenue deficit, fiscal deficit and the debt stock to within predetermined levels. Kerala is one of the states which have consistently failed to achieve the FRBM targets.

Low own resources mop-up

Its debt burden is an enigma given that the state tops in per capita consumer expenditure, an indicator of the ability of its people to pay taxes. During the first 10 years of its formation (1957-58 to 1967-68), Kerala accounted for 4.45 per cent of the own revenue mobilised by all states in India. It may be noted that it used to be one of the poorest states those days.

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But NRI remittances in later years changed the scenario overnight with consumption levels trending up. In 1983, Kerala was third in per capita consumer expenditure but went on to top the charts in 1999-2000. This got hardly reflected in its revenue structure. In 2018-19, its share in the own resources mobilised by all states put together has only fallen to 4.38 per cent.

Off-budget borrowings by KIIFB

More baffling is that the State mobilises as much as 60 per cent of its own resources under four heads — liquor, lottery, motor vehicles and petrol, notes Sebastian. Their share in 1980-81 was only 27.93 per cent. Heavy reliance on liquor and lottery for public resource mobilisation is unique to Kerala. While these two items contributed only 14.77 per cent of own resources in 1970-71, their share is now 36 per cent. It is widely acknowledged fact that the major consumers of liquor and lottery are the poor and marginalised.

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It is clear that failure to tap the potential for public resource mobilisation is at the root of Kerala’s debt burden. The debt stock may have been further compounded by the off-budget borrowing through Kerala Infrastructure Investment Board (KIIFB). It may well be the case that KIIFB is an entity removed from the state budget, but its repayments are met from the state’s revenue. So, if its investments fail to generate revenue, it could add up further to the state’s existing debt stock.