The story so far: The Finance Minister of Kerala, K.N. Balagopal, had strongly objected to observations in a recent audit report by the Comptroller and Auditor General (CAG) for 2020 (the State Finance Report that was tabled in the Assembly on November 11 on the Kerala Infrastructure Investment Fund Board (KIIFB)’s “off-Budget borrowings”. The CAG asked the Government to disclose details of off-budget borrowings made through the KIIFB and Kerala Social Security Pension Ltd (KSSPL) in the budget and accounts. Mr. Balagopal said the CAG had merely echoed the findings in the previous audit report and that the Assembly had rejected the findings.
What is the KIIFB?
Kerala Infrastructure Investment Fund Board (KIIFB) is a body corporate constituted by the Government of Kerala to mobilise financial resources for infrastructure development of the State. It was established on November 11, 1999 through legislation -- Kerala Infrastructure Investment Fund Act 1999 -- passed by the Kerala State Assembly. In 2016, the then newly elected Left Front Government decided to considerably expand the scope of KIIFB’s operations, and to use this institution to speed up infrastructure building and economic growth in Kerala.
- Kerala Infrastructure Investment Fund Board (KIIFB) is a body corporate constituted by the Government of Kerala to mobilise financial resources for infrastructure development of the State.
- Kerala aims to leverage its social sector achievements for future economic growth led by knowledge industries, especially considering the expected shrinking in the size of its working age population.
- KIIFB intends to raise funds through term loans from public sector banks and other financial institutions. In 2019, it became the first ever State Government agency in India to access the offshore debt market. However, the CAG pointed out that these borrowings by KIIFB are outside of the State budget and had high chances to later become a liability.
Between August 2016 and November 2021, the Kerala State Government granted approval for 918 infrastructure projects worth ₹64,338 crore with funding through KIIFB. These projects are aimed to enhance Kerala’s capabilities in the areas of transport, energy, information technology, water sanitation, and the social sector. The initiatives that have been assured of KIIFB support include Kerala Fibre Optic Network (also known as KFON), which aims to provide free internet to 2 lakh households; road highways with a total length of more than 1800 kilometres; the building of high-capacity power transmission lines; petrochemical and pharma parks in Kochi; and life sciences park in Thiruvananthapuram. KIIFB funds have been used to modernise buildings and other facilities in schools and hospitals across the State, for tourism projects, and to set up stadiums and upgrade sports facilities in every district of the State.
As on March 31, 2020, of the 675 projects that received approval for funding through KIIFB, work had been started on 269 projects, with a total spending of ₹10581.8 crore on them. The significance of the spending through KIIFB can be understood when seen against the fact that the total capital expenditure by the State Government through the years from 2016-17 to 2020-21 was ₹52,054 crore.
Why Kerala needs infrastructure spending?
A remarkable feature of public policy in Kerala has been the large spending by the State Government, over the decades, on health and education. For instance, in 1980-81, social sector expenditure as a proportion of the total budgeted expenditure was 45.7% in Kerala, while the average for all Indian states was only 29.8%. Such expenditures have contributed to the well-known achievements by the State in human development.
Kerala aims to leverage its social sector achievements for future economic growth, especially growth led by knowledge industries. The sectors in which Kerala sees growth possibilities include healthcare, life sciences, biotechnology, pharmaceuticals, space and aeronautical technologies, and artificial intelligence. At the same time, Kerala is conscious that the window of growth opportunities will be open for it only for a short period, particularly so with the expected shrinking in the size of its working age population. Therefore, there is an urgent need for upgrading social and physical infrastructure – including roads, high-speed railways, schools, research parks – across the State, which is crucial for accelerating economic growth.
High hopes: Chief Minister Pinarayi Vijayan inaugurating the listing of the Masala bonds issued by KIIFB at the London Stock Exchange in 2019. File photo.
Why KIIFB for infrastructure projects?
The nature of federal fiscal relations in India with the Union Government holding the power to collect much of the tax revenue has always been a hurdle to Kerala’s development aspirations. In 2019-20, the State’s own tax revenue as a proportion of gross state domestic product was only 6.4%. With the implementation of the goods and services tax (GST) since July 1, 2017, the State Governments had to give up a part of the tax raising powers they used to enjoy earlier – thereby weakening their financial autonomy even further. The Union Government has agreed to compensate the States to bridge the revenue shortfall on account of GST. However, after the outbreak of the COVID-19 epidemic, there has been a delay in the transfer of GST compensation, which has worsened the fiscal situation of the States.
After 2015-16, the share of the costs borne by the States in centrally sponsored projects increased to 40%, from the earlier 25%. At the same time, the States are required – by legislation – to restrict their fiscal deficits to 3% of GSDP (gross state domestic product). In the wake of the Covid crisis, the States have been allowed to raise their borrowing limits to 5% of GSDP, but this is subject to certain conditions set by the Union Government. Notably, such shrinking of the fiscal space has occurred during a time when Kerala is required to step up spending to battle the crises induced by the pandemic and also the floods and other natural calamities that hit the State during 2017-19.
On account of the above-referred factors, the budgetary resources available in Kerala for capital spending have been very small. Capital expenditure by the State Government as a proportion of Kerala’s GSDP was only 1.35% in 2020-21. Given such a context, the funding of infrastructure projects through KIIFB has been quite crucial. It is expected that in the coming years, capital expenditure through KIIFB would amount to an additional 0.6% to 1% of the state’s GSDP. Although the level of investment will still be small, its overall impact can be substantial in Kerala, a state that is widely known for its reserves of skilled labour, entrepreneurship and international connections.
Pattern of Funding
KIIFB intends to raise funds through term loans from public sector banks and other financial institutions. Another source is the money raised through a chit fund scheme for non-resident Indians ( Pravasi chitti scheme ). In addition, in May 2019, KIIFB became the first ever State Government agency in India to access the offshore debt market when it raised ₹2,150 crore through Masala bonds, an instrument approved by the Reserve Bank of India. At the same time, KIIFB is assured of funding from the State Government, which shares a part of the motor vehicle tax (50% of the entire proceeds from 2021 onwards) and the fuel cess with KIIFB. In 2019-20, KIIFB received ₹2,200 crore from the State Government while it also raised ₹5,165 crore through term loans and the Masala bonds.
Concerns by CAG and others
KIIFB has been in the news when the Comptroller and Auditor General (CAG) raised concerns about this institution in its audit on Kerala’s finances for 2018-19. The CAG pointed out that the borrowings by KIIFB are outside of the State budget and, therefore, do not have legislative approval. At the same time, the CAG expressed fears that the State Government may have to repay the liabilities of KIIFB in future.
The State Government opposed the findings by the CAG, and the State Assembly passed a resolution in this regard at the height of the controversy during February 2021. According to the State Government, KIIFB’s borrowings may be termed as contingent liabilities – they will become a liability on the Government only when KIIFB defaults. In fact, this is not very different from the way development financial institutions (DFI) operate anywhere. Dr. Thomas Isaac, former Finance Minister of Kerala and the architect of KIIFB, said that the Union Government is indeed following the example set by Kerala when it announced the setting up of a DFI in March this year to boost infrastructure financing in the country.
The challenges ahead
Given its enormous untapped potential for economic growth, there is much scope for debt-financed expenditure in Kerala -- on the lines suggested by the renowned economist John Maynard Keynes. The debt that is created will not pose any danger as long as it is growing at a rate slower than the growth of incomes (and therefore fresh saving) triggered by the expenditure. If the liabilities incurred by Kerala till date on account of KIIFB are added to the debt owed by the State Government, the resultant figure would still be less than 32% of Kerala’s GSDP – which is clearly within manageable limits. The real challenges ahead include the completion of new projects on a timely basis. It is also to be seen whether the committed investments are large and impactful enough to bring about a bigger transformation in Kerala’s economy.
Jayan Jose Thomas is a Professor of Economics at the Indian Institute of Technology Delhi and a former member of the Kerala State Planning Board
