KOCHI: The deluge on the 71st Independent Day paradoxically revealed how interdependent we are in both personal and financial aspects. Now, the State is desperately searching for funds to rebuild the damaged infrastructure, buildings and agriculture sector. While several estimates of the loss and fund requirement for the reconstruction and rehabilitation were being made, Chief Minister articulated his vision of building a New Kerala, instead of rebuilding the damaged ones.
A preliminary report by the World Bank has estimated Rs 25,050 crore to rebuild the State. The funding strategies like inter alia, raising the borrowing ceiling for the State by 50%, from 3% of GDP to 4.5%, and external borrowings from international financial institutions were considered.
The state budget 2017-18 provided for debt repayment of Rs 13,606 crore and interest payment of Rs 13,632 crore, which together accounts for 23% of the total expenditure. A Crisil research report based on the debt-to-GDP ratio classified Kerala as one of the ‘worse-off states’ in terms of fiscal health.
As the funding through rupee bond will cost 9% interest, the government decided to raise Rs. 15,900 crore as loan from the World Bank and other international funding agencies. The borrowing from international financial institutions can be useful in terms of world-class technical knowledge and quality standards. But high currency depreciation of the rupee can make the cheap foreign currency loan very expensive.
Indian rupee depreciated by 15 per cent from January to October this year. Even taking a long-term perspective, the rupee depreciated by 335%, from 17 per dollar in January 1990 to 74 in October 2018, averaging 12% per year. Though assuming an average 8% annual depreciation, the financing cost of loan taken in the dollar at 2% interest will have effective financing cost of 10%, which is higher than the rupee-denominated bond rate of 8%. The government and the consulting firm, KPMG, appointed for Rebuild Kerala project should factor the foreign exchange loss in calculating the total financing cost.
The government’s plan to consider rupee denominated masala bond through KIIFB is a step in the right direction, though its prospects are dim with the heavy depreciation of rupee. Rupee bond targeting NRKs may yield a better result. For financially viable revenue-generating projects, the government may consider other financing options such as CIAL model PPPs. For other projects, Corporate Social Responsibility (CSR) programmes like Kizhakkambalam 2020, crowdfunding platforms or sponsorships by overseas Malayali associations could be explored.
Financial management has not been given its due weightage in public finance. Nava Kerala should strengthen the public finance management system with professional financial experts at the helm, capacity development programs and transparency and accountability mechanism. Risk management and hedging arrangement should be in place for foreign currency loans.
The excessive borrowings, especially in foreign currency, for Nava Kerala project would lead to a long-term financial dependency for the state. Critics have attributed the cause of the deluge to unplanned development and refusal to implement Gadgil report. Although this is debatable, it is undeniable that innovative funding strategies sans debt, especially in foreign currency, to rebuild the damages will save the state from a financial disaster.
The measures taken to revamp the damages of a natural calamity on the day of political Independence should not take us to a debt trap and lingering financial dependency era.
Francis Mathew is a chartered accountant and the CEO of Scaleup Consulting LLP, formerly Senior Financial Controls Specialist with Asian Development Bank. (The views expressed by the author are his own).
REBUILDING OF KERALA
The government should consider financing options such as CIAL model Public Private Partnership, Corporate Social Responsibility programmes like Kizhakkambalam 2020, and crowdfunding platforms and sponsorships by overseas Malayali associations could be explored.