What is KIIFB and what is its role? Why has the CAG expressed concern over this and what has been the response of the Kerala government?
the story So Far: Kerala Finance Minister KN Balagopal had strongly objected to the comments in the Comptroller and Auditor General’s (CAG) recent audit report for 2020 (the state finance report which was tabled in the assembly on November 11 on Kerala Infrastructure Investment Fund). “Budget out-of-budget borrowings” of the Board (KIIFB). The CAG asked the government to disclose the details of off-budget borrowings made through KIIFB and Kerala Social Security Pension Limited (KSSPL) in the budget and accounts. Shri Balagopal said that the CAG had only echoed the findings in the previous audit report and the Vidhan Sabha had overruled the findings.
What is KIIFB?
Kerala Infrastructure Investment Fund Board (KIIFB) is a body corporate constituted by the Government of Kerala to mobilize financial resources for infrastructure development of the state. It was established on November 11, 1999 through a law – the Kerala Infrastructure Investment Fund Act 1999 – passed by the Kerala State Assembly. In 2016, the then newly elected Left Front government decided to significantly expand the scope of operations of KIIFB and use this institution to build infrastructure and accelerate economic development in Kerala.
Summary
- Kerala Infrastructure Investment Fund Board (KIIFB) is a body corporate constituted by the Government of Kerala to mobilize 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 given the expected shrinkage 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 state government agency in India to access the offshore loan market. However, the CAG pointed out that these borrowings by KIIFB are outside the state budget and there was a high probability of the latter becoming a liability.
Between August 2016 and November 2021, the Kerala state government approved 918 infrastructure projects worth ₹64,338 crore with funding through KIIFB. These projects are aimed at enhancing the capabilities of Kerala in the areas of transport, energy, information technology, water sanitation and social sector. Initiatives that have been assured for KIIFB support include the Kerala Fiber 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 km; construction of high capacity power transmission lines; Petrochemical and Pharma Park at Kochi; and Life Science Park in Thiruvananthapuram. The KIIFB funds have been used for modernization of buildings and other facilities in schools and hospitals across the state, for tourism projects, and for the establishment of stadiums and up-gradation of sports facilities in every district of the state.
As on March 31, 2020, out of 675 projects approved for funding through KIIFB, work on 269 projects had been initiated, with a total expenditure of ₹10581.8 crore. The importance of spending through KIIFB can be seen against the fact that the total capital expenditure by the state government in the years 2016-17 to 2020-21 was ₹52,054 crore.
Why does Kerala need infrastructure spending?
A notable feature of public policy in Kerala has been the heavy spending on health and education by the state government for decades. For example, in 1980-81, social sector expenditure as a proportion of total budgeted expenditure in Kerala was 45.7%, while the average for all Indian states was only 29.8%. Such expenditure has 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 led by the knowledge industries. Areas where Kerala sees growth potential include healthcare, life sciences, biotechnology, pharmaceuticals, space and aeronautical technologies and artificial intelligence. At the same time, Kerala is aware that the window of growth opportunities will remain open for it only for a short period, especially with the expected shrinkage in the size of its working-age population. Therefore, there is an urgent need for upgradation of social and physical infrastructure across the state – including roads, high-speed railways, schools, research parks – which is crucial to spur economic growth.
Why KIIFB for infrastructure projects?
The nature of federal fiscal relations in India coupled with the power of the central government to collect more tax revenues has always been a stumbling block to Kerala’s development aspirations. In 2019-20, the state’s own tax revenue as a ratio of Gross State Domestic Product was only 6.4%. With the implementation of the Goods and Services Tax (GST) from July 1, 2017, state governments had to give up some of the tax-raising powers they previously enjoyed – further weakening their financial autonomy. The central government has agreed to compensate the states to meet the revenue shortfall due to GST. However, after the outbreak of the COVID-19 pandemic, there has been a delay in the transfer of GST compensation, worsening the financial position of the states.
After 2015-16, the share of cost to be borne by the states in centrally sponsored projects increased from 25% earlier to 40%. Also, states – by law – are required to limit their fiscal deficits to 3% of GSDP (gross state domestic product). In the wake of the COVID crisis, states have been allowed to increase their borrowing limits up to 5% of GSDP, but subject to certain conditions prescribed by the central government. Notably, such shrinkage of fiscal space comes at a time when Kerala needs to increase spending to fight pandemic-induced crises and the state’s floods and other natural calamities during 2017-19.
Due to the above factors, the budgetary resources available for capital expenditure in Kerala are very less. Capital expenditure by the state government as a proportion of Kerala’s GSDP was only 1.35% in 2020-21. In such context, funding of infrastructure projects through KIIFB has been of considerable importance. It is expected that in the coming years, the capital expenditure through KIIFB will be in addition to the state’s GSDP in the range of 0.6% to 1%. Although the level of investment will still be small, its overall impact could be substantial in Kerala, a state widely known for its wealth of skilled labour, entrepreneurship and international connections.
funding pattern
KIIFB intends to raise funds through term loans from public sector banks and other financial institutions. Another source is the amount raised through the Chit Fund Scheme for NRIs (Pravasi Chitti SchemeAlso, in May 2019, KIIFB became the first state government agency in India to access the offshore debt market, when it raised Rs 2,150 crore through Masala Bonds, an instrument approved by the Reserve Bank of India. Also, KIIFB is assured funding from the state government, which shares a portion of motor vehicle tax (50% of the entire income since 2021) and 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 masala bonds.
Concerns of CAG and others
KIIFB was 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 the state budget and, therefore, do not have legislative approval. At the same time, the CAG expressed apprehension that the state government may have to pay the liability of KIIFB in future.
The state government opposed the CAG’s findings, and the state assembly passed a resolution in this regard during February 2021 at the height of the controversy. According to the state government, KIIFB’s borrowings can be termed as contingent liabilities – they will become a liability on the government only if KIIFB defaults. In fact, this development is not much different from the way financial institutions (DFIs) work anywhere. Dr. Thomas Isaac, former finance minister of Kerala and architect of KIIFB, said the central government is indeed following the example set by Kerala when it set up a DFI in March this year to boost infrastructure financing in the country. was announced.
challenges ahead
Given its vast untapped potential for economic growth, Kerala has great scope for debt-financed expenditure – along the lines suggested by renowned economist John Maynard Keynes. The debt created will not pose any threat as long as it is growing at a rate slower than the rate of growth of income (and hence fresh savings) arising from expenditure. If the liabilities incurred by Kerala so far on account of KIIFB are added to the state government’s debt, the resulting figure would still be less than 32% of Kerala’s GSDP – which is clearly within manageable limits. The real challenges ahead include timely completion of new projects. It also remains to be seen whether the investments committed to bring about a major transformation in Kerala’s economy are large and effective.
Jayan Jose Thomas is Professor of Economics at the Indian Institute of Technology Delhi and a former member of the Kerala State Planning Board.
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