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KIIFB not driving Kerala to debt trap, says Thomas Isaac

Vinson Kurian Thiruvananthapuram | Updated on June 30, 2021

Astute moves FM Thomas Isaac   -  The Hindu

Draws a parallel with DFI at the Centre

Former Kerala Finance Minister Thomas Isaac has said that the two 2021-22 State Budgets have become 'a turning point in Kerala's economic evolution' because it seeks to ensure a common man’s lifeline through an unprecedented increase in welfare pension, social security and livelihood assistance.

He dismissed speculations that the LDF government that won a second term this year may be driving the state into a debt trap through 'reckless borrowing programmes' envisioned within the Budget and without, especially through the Kerala Infrastructure Investment Fund Board (KIIFB).

Unfortunate controversy

"Yes, borrowings through the KIIFB mechanism have raised a lot of controversies, but our stance has been vindicated after the presentation of the last Union Budget," he said while taking part in a virtual discussion hosted by the Gulati Institute of Finance and Taxation (GIFT) here recently.

The Centre, too, has proposed a development financial institution (DFI), which is another form of KIIFB in every sense. The ₹5 lakh crore that it hopes to borrow is not part of the Union Budget. Instead, the DFI will leverage its shareholding and other budgetary resources to raise big money.

"Since we are only a state, our scales are modest. But one can already see a dramatic impact on social infrastructure, and I'm certain this will transform the state in the next 2-3 years. KIIFB is an inevitable tradeoff between a high welfare expenditure regime and the need to fund infrastructure spending."

Budget focus on social sector

Isaac, who founded KIIFB, pointed to the budget's focus on the social sector and welfare in the context of the Covid and its impact on life and livelihood. But despite these higher social expenditures, the State government has been spending very heavily on infrastructure, quite unlikely in the past.

According to him, committing big funds for welfare expenditure leaves hardly any money for capital expenditure. "In KIIFB, we've found a solution for it. But I can also assure you that there are enough capabilities in its structure to ensure it doesn't end up as a Ponzi-like scheme."

Assuming that the basic infrastructure is in place in the next 2-3 years, Issac said we will use the budget proposals to transform the state's economic base. The KIIFB Act provides that 50 per cent of the Motor Vehicle Tax and the entire petroleum cess is transferred to it.

Asset Liability Mechanism

Isaac sought to dismiss fears expressed by academician and author Mary George that the state is being led into a debt trap. Isaac said that there's an asset-liability mechanism built into the system. It ensures that liabilities do not exceed assets, he said.

"You don't overcome debt; you grow out of it. As infrastructure grows, so will economy, and the debt burden will reduce. And that's what all governments do, at the Centre or even abroad. Just be mindful of the change in strategies being adopted and see whether it leads to fiscal consolidation."

Fiscal consolidation on

According to Isaac, if one takes away the Covid-hit two years, fiscal consolidation has been taking place in the state overall. In the last four years, both revenue and fiscal deficits have only tapered.

"It is in the fifth year that Covid struck. We must return to a path of fiscal consolidation at the soonest possible. There is a need to compress revenue spending and boost revenue," Isaac said.

Published on June 30, 2021

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