Kerala among most financially unhealthy States; makes substantial off-budget borrowings: Centre to Supreme Court

Kerala's financial health is in dire straits due to substantial off-budget borrowings and a compromised fiscal edifice, the Central government recently told the Supreme Court [State of Kerala vs Union of India]. .Attorney General (AG) for India R Venkataramani in a detailed written note stressed that there were multiple studies documenting poor public finance management by the State of Kerala."Kerala has been one of the most financially unhealthy States and its fiscal edifice has been diagnosed with several cracks ... Squeezed for funds for capital expenditure and to circumvent borrowing limits ... Kerala has resorted to substantial off-budget borrowings through the Kerala Infrastructure Investment Fund Board (KIIFB)", he stated..The written note came in response to an original suit filed by the State of Kerala raising grievance over the Central government allegedly interfering with the former’s power to borrow and regulate its own finances.The plea filed by the Kerala government in December has alleged that the Centre's actions can lead to a grave financial crisis, as the State has not been able to fulfil the commitments made in its annual budgets.Specifically, the State has contended that the imposition of a Net Borrowing Ceiling as deemed by the Union government limits borrowings from all sources including the open market and curtails its exclusive constitutional powers.A bench of Justices Surya Kant and KV Viswanathan is set to take up the matter on February 13 next and decide on Kerala's interim relief application.The Supreme Court had in January issued notice in the case..The Attorney General in his note highlighted several financial indicators of Kerala in support of his contentions including high levels of debt-GDP ratio, interest payments to revenue receipts ratio, gross fiscal and revenue deficits, share of provident funds in its outstanding liabilities and pay/pension payments.These are coupled with a decline in expenditure on capital formation and a decline in revenue receipts as percentage of GSDP, it was submitted. "Despite the devolution of substantial resources from Central taxes and duties, highest share of post devolution Revenue Deficit Grant, financial support extended by the Union Government over and above the recommendations of the Finance Commission and substantial transfer of resources to the State Government under the Centrally Sponsored Schemes, any financial stress that the Government of Kerala is facing is purely due to its own financial mismanagement," it was submitted..The AG underscored that prudent public finance management is a national priority, with implications for the nation's competitiveness and sovereign credit ratings.If a State indulges in reckless borrowing to finance unproductive expenditure or poorly targeted subsidies, it will crowd out private borrowing from the market, he contended. "Increases in the State's debt servicing liabilities as a consequence of higher borrowing by it will reduce the availability of funds for development, leading to impoverishment of people and loss of State income, and hence also loss of national income ... if public finance is treated as a State-specific and not a national issue, the entire edifice of federal structure in the country would collapse like a pack of cards," the note said. The debt levels of State governments affects credit ratings of the country by increasing borrowing costs, which act as markers to qualify and quantify the general investment atmosphere. "Macroeconomic management and public financial management, both quantitatively and qualitatively, affect the ratings in a big way. Hence for good ratings, it is essential that the general Government debt which includes the debt of State, be managed properly.".Kerala is the second State to move the top court in recent times in relation to a financial dispute with the Union government.Earlier, the Punjab government filed a suit against the Central government over the non-reimbursement of statutory fees allegedly running into over ₹4,000 crore that the State government had levied on behalf of the Central government during the procurement of food grains.