Kerala: LDF Govt Accuses Centre of Double Standards in Slashing Borrowing Limits

The borrowing limit of the government of Kerala has been slashed drastically by the Central government. After granting permission to borrow Rs 32,442 crore during April 2023 for the financial year (FY), the new intimation has fixed the amount to Rs 15,390 crore. Considering the borrowing limit sanctioned, it amounts only to 2% of the Gross State Domestic Product (GSDP). 

The state government has shot off a letter to the Union finance ministry seeking clarification on how the amount for open market borrowing (OMB) was arrived upon. 

The Left Democratic Front (LDF) government has been aiming to improve public education, social welfare and nutrition, health, agriculture and allied services and public infrastructure through public spending. But, the cut in the borrowing limit has raised concerns over implementing the government's plans in the budget for the ongoing financial year.

Though state governments are empowered to source loans as per Article 293 (3) of the Constitution, the recent centralisation of financial management by the Central government, led by the Bharatiya Janata Party (BJP), runs against the federal principles, forcing state governments to be at the mercy of the Central government, says the Kerala government.

The reason for the reduction and the duration of the borrowing limit (nine months or 12 months), for which the permission has been granted, remain ambiguous. The LDF has accused the Central government of strangling the developmental activities carried out in the state for political reasons. 

DISRUPTING DEVELOPMENT

After a letter was sent to the Kerala government in April granting permission to borrow Rs 32,442 crore for the ongoing FY (2023-24), a recent letter has slashed the borrowing limit to just Rs 15,390 crore. The LDF government expected a borrowing limit of Rs 22,000 crore for the current fiscal year.

The reduction occurred when the state received acknowledgement of its handling of finances from the Comptroller and Auditor General (CAG). Despite several constraints, the government has been credited for reducing expenditure and improving tax revenues by CAG.

Commenting on the Centre’s move, K N Harilal, professor at the Centre of Development Studies, Thiruvananthapuram, accused the Union government of creating roadblocks to the developmental plans of the state government. 

“The budgetary provisions were made as per projections of income, allocation from the Centre and borrowings. When these are disrupted, the functioning of the state itself is affected,” he told NewsClick. 

Of the state government's development activities and public spending targets, the distribution of welfare pensions to 60 lakh beneficiaries would also be badly hit. The government has focused on public health, education, social welfare schemes, and nutrition. 

“More than anything, the welfare pension of Rs 1,600 to 60 lakh beneficiaries seems to disturb the Union government. It looks like they want to disrupt this. Also, other plans of the state government for improving roads, infrastructure and developmental activities will be affected,” Harilal said. 

‘DOUBLE STANDARDS’ ON BORROWING LIMIT

The Union government has cited off-budget borrowings of the Kerala Infrastructure Investment Fund Board (KIIFB) and Kerala Social Security Pension Limited (KSSPL) as the reason for the reduction in the OMB limits. But the LDF government has rejected the rationale behind the decision and has accused the BJP-led Union government of “double standards”. 

Thomas Isaac, former state finance minister, tweeted about the different benchmarks set by the Union government for its own borrowing limit and state governments. 

“The question is simple: Has off budget borrowings ever been counted as part public debt of state or central govts? NO! Is new rule applicable for Centre? NO! This asymmetry is unacceptable .But GoI has decided to apply the new rule retrospectively and cut Kerala’s public borrowing,” he tweeted.

Harilal also accused the Central government of considering short-term loans obtained for liquidity management as public debt and reducing the borrowing limit based on this. 

“On the one side, the Union government is drastically reducing taxes on the divisible pool and increasing cess and surcharges, which go only to the Union government. This is nothing but strangling the state government,” he added. 

Given the new OMB limit set for Kerala, Isaac claimed it accounted for only 2% of the GSDP. In comparison, 3% is permitted, with an additional 0.5% being granted for the power sector. 

“Centre cut Kerala’s public borrowing from 3% of GSDP to 2.2% last year. It is further reduced to 2%this year. It is a political action to disrupt State's development. Has borrowing by the Central public sector ever been included in the Centre’s borrowing? Why such double standards?” Isaac tweeted. 

“The limit of borrowings is guided by the Fiscal Responsibility and Budget Management Act, 2003. The Constitution also permits state governments to borrow for their public spending. Despite all the provisions, the Union government is creating uncertainty intentionally,” Harilal said. 

The Communist Party of India (Marxist) also condemned the Minister of State for External Affairs and Parliamentary Affairs, V Muraleedharan, for his misleading comments on the financial management of the state, despite appreciation by CAG.