For the third year in a row, the Comptroller and Auditor General has warned Kerala of the dangers of fattening off-budget borrowing and wants the borrowings of entities like the KIIFB to be included in annual budget documents and included in budget revenues and deficits.
Finance Minister KN Balagopal said the CAG’s comments had already been rejected by the Assembly’s Public Accounts Committee.
He also said that the CAG is unaware of the social and economic relevance of the entities that carry out these loans, which the CAG qualifies as off-budget.
The CAG’s latest negative remark came at a time when the Center was threatening to include Kerala’s off-budget borrowing in its total annual open market borrowing, a move that could significantly reduce the state’s borrowing capacity.
The Center is cracking down on off-budget borrowing so intensely that former finance minister TM Thomas Isaac was summoned by the Enforcement Branch to question him about the masala bonds the KIIFB had obtained from London during his tenure.
The latest CAG report, tabled in the Assembly on Wednesday, observes that Kerala resorted to off-budget borrowing of Rs 9,273.24 crore in the financial year 2020-21.
“State government off-budget borrowing has the effect of circumventing the state’s Net Borrowing Limit (NBC) by channeling lending out of the state budget through owned statutory companies/bodies or controlled by the state, although they are responsible for repaying those loans,” the CAG report on state finances says. “These borrowings naturally have an impact on the revenue gap and the budget deficit and therefore have the effect of exceeding the targets set for the fiscal indicators under the Kerala Fiscal Responsibility Act 2003.
Creating such liabilities, without disclosing them in the budget, raises questions of both transparency and intergenerational fairness,” the report says.
And, as last year’s report said, this year’s report also recommended including details of off-budget borrowing in annual budget documents.
The Kerala Infrastructure Investment Fund Board (KIIFB) and the Kerala Social Security Pension Limited (KSSPL) are the two main instruments used by the LDF government to contract off-budget borrowing.
Finance Minister KN Balagopal, in a brief note appended to the CAG report, reiterated that KIIFB borrowings were not direct liabilities but only contingent liabilities “especially since KIIFB also finances income-generating projects and also generates its own income.
Balagopal also refuted the CAG’s claim that the KSSPL borrowings were off-budget government debt. “In reality, KSSPL’s borrowing is only intended to manage state liquidity and ensure that the social pensions of over 60,000 state beneficiaries are not delayed due to cash management issues.
Most of these sums are repaid during the year,” the finance minister said.
Furthermore, the minister said that the CAG report lost sight of the fact that it was thanks to Kerala’s broad social safety net through the KSSPL, that the state had been able to sustain poverty in below 1%, the lowest in the country. .
Accusing the CAG of circumventing the budget, the KIIFB had previously argued that it was an institution with a “very solid” source of revenue. Half of the state’s annual motor vehicle tax revenue and all of the gasoline tax it collects each year would legally go to the KIIFB under the annuity scheme.
The last year’s CAG report observed that the KIIFB was entirely dependent on public funds. But the KIIFB countered by saying that at least 25% of its projects are revenue generating. For example, he says that money spent on Kerala Optic Fiber (K-FON) network and industrial parks will accrue to KIIFB with interest.
“If these revenues and the annual money transferred to KIIFB by the government are taken into account, KIIFB can never fall into the debt trap,” KIIFB had argued.