As CPI(M) criticises Centre’s economic policy on Kerala, a look at the state’s financial woes

Another source of loss of revenue, of around 10,000 to Rs 12,000 crore per year, would be because of the cessation of Goods and Services Tax (GST) compensation from June 2022. After the GST was introduced in 2017, the Centre had said a compensation amount would be extended to states up to five years, to make up for shortfall in their revenue collection after multiple taxes were brought under the GST.

Thirdly, another chunk of loss of Rs 8,000 crore is expected due to restrictions on the state’s borrowing limit.

Fixing net borrowing ceiling (NBC)

The net borrowing ceiling of a state (the amount that it can borrow) for each financial year is determined by the Union Finance Ministry. This is calculated on the basis of the projected Gross State Domestic Product (GSDP) of that state and by taking into consideration the recommendations of the Finance Commission, a constitutionally-mandated body whose members are appointed by the President of India.

In line with the recommendations of the 15th Finance Commission (that gave recommendations for 2021 to 2026), the normal Net Borrowing Ceiling (NBC) for all states for fiscal 2023-24 has been fixed at 3 per cent of the projected GSDP. For Kerala, the projected GSDP for the current fiscal is Rs 10,81,412 crore. Accordingly, NBC at the rate of three per cent of the projected GSDP for Kerala is Rs 32,442 crore.

Inclusion of off-budget borrowings as state loan

Kerala has undertaken off-budget borrowings mainly for the Kerala Infrastructure Investment Fund Board (KIIFB) and Kerala Social Security Pension Limited (KSSPL). While KIIFB was floated in 2016 to mobilise funds for the state’s infrastructure projects, KSSPL, launched in 2018, was meant to do so for social security welfare pensions.

In 2017, the Union Finance Ministry stipulated that all such borrowings of the state government entities that are receiving budgetary support from the state budget, for repayment of the principal and or interest, will also be taken into consideration while setting the state’s borrowing limits. In short, the Union Finance Minister considers the off-budget borrowings, mainly of KIIFB and KSSPL, as the borrowings made by the state government itself.

In Kerala, the state budget has to make provisions for repaying the off-budget borrowings made by KIIFB and KSSPL, although these borrowings do not reflect upon the state budget. The inclusion of such off-budget borrowings as the state’s own borrowing has, therefore, brought down its net borrowing ceiling.

Kerala demand to exclude off-budget borrowings from NBC

The state government has said that the Centre’s decision to factor in off-budget borrowings made by the entities, at the guarantee of the state, while fixing the NBC has brought down its borrowing space. This would adversely affect the cash-strapped state’s borrowings, contributing to a grim financial situation.

Therefore, it has demanded excluding the off-budget borrowings of public entities from the state’s annual borrowing limit. Kerala has been urging the Union Government to increase its borrowing limit to 1 per cent above the ceiling equation for the financial year 2023-24. The control over the borrowing of the state government, according to CPI(M), amounted to a violation of the federal principles of the Constitution.

Fall in Kerala’s share from the divisible pool

The divisible pool is that portion of gross tax revenue which is distributed between the Centre and the States. The states’ share in the divisible pool during the 14th Finance Commission (meant for the years 2015 to 2020) had been 42 per cent. However, this has been brought down to 41 per cent as per recommendations of the 15th Finance Commission.

Among the states, Kerala’s share of the divisible pool has been coming down over the years. During the tenure of the 10th Finance Commission for the years 1980 to 1985, the tax share of Kerala was 3.875 per cent of the divisible pool. That share came down to 3.057 per cent during the 2000-2005 period. Now, into the tenure of the 15th Finance Commission, the share is at 1.92 per cent.

The Kerala government is of the view that this has resulted in huge revenue loss for the state. The Finance Commission, in its scheme for deciding the share of taxes for states, sets various parameters and looks at all of the states’ performances in that regard. This includes the state’s total area, population, forest cover and its efforts at population control. But Kerala states that its effective birth control measures have actually contributed to the fall in the allocation of central tax.

Change in ratio of Centrally sponsored schemes

Centrally sponsored schemes are all government schemes which are funded jointly by the Central government and the states but are implemented by the state government. They are being now implemented under two categories: Core of the Core Schemes and Core schemes.

The core of the Core schemes is 90 per cent funded by the Centre, but the number of projects under this category has come down. Further, the state has a limited role in tailoring these projects to address region-specific issues.

In the projects under the Core category, the states have to shoulder 40 per cent of the financial commitment, which, according to Kerala, contributes to its fiscal constraints. It has been demanding that the ratio of Centrally Sponsored Schemes under the Core category be increased to 75:25 from the present 60:40. However, the Union Government has not favoured the demand so far.