KOCHI: Dealing a heavy blow to the Kerala government’s ambitious plans to fast-track infrastructure and development projects ahead of the upcoming assembly elections, the Centre has sharply reduced the state’s borrowing limit.
The Union finance ministry has informed the state that its borrowing limit for January–March period has been reduced by Rs 5,944 crore from the initially approved Rs 12,515 crore, Finance Minister K N Balagopal said on Thursday.
The state is now left with a mere Rs 5,672 crore to sustain its operations for the next three months. Effectively, the state’s monthly borrowing capacity has been throttled to approximately Rs 2,200 crore—a figure far below its actual requirements, he said.
“We have managed to tide over the crisis in the last four-and-half years despite the financial burdens imposed on us by the Centre. The latest development comes even as the state’s annual average financial expenditure is nearing Rs 2 lakh crore in the current fiscal... However, there is an overall reduction of Rs 1,25,000 crore in borrowing in the last five years due to the Centre’s restrictions.
The Centre is squeezing the state’s financial resources which is hitting the state’s overall development majorly,” Balagopal said.
Centre backtracking on its responsibilities: Min
The Centre earlier justified the financial tightening by factoring in off-budget borrowings made by KIIFB and Social Security Pensions Ltd into the state’s overall debt ceiling. This “netting out” policy implemented last year had also drawn sharp criticism from the state leadership.
“The Centre is backtracking on its responsibilities under the Centre-state relationship one by one,” Balagopal said. It started with the introduction of the GST reform, and the latest rate rationalisation with regard to GST is between 8 and 9%.
As per a study of Gulati Institute of Finance and Taxation, Kerala alone will suffer a financial loss of Rs 8,000 to Rs 10,000 crore in the next financial year. Recent changes in MGNREGS will impose an additional burden of Rs 1,600–2,000 crore annually on the state. Currently, the Centre bears 90% of the scheme’s expenditure. With that reduced to 60%, the state will be forced to shoulder a significantly higher share.
The timing of the latest cut is particularly damaging, Balagopal said. The final quarter of the financial year sees a surge in public spending. The state treasury is currently bracing for a massive outflow. Approximately Rs 20,000 crore is required to clear pending bills for public works. Roughly Rs 15,000 crore is needed for salaries of government employees and retired personnel. With the recent hike in welfare pensions to Rs 2,000 per month, the social security net requires additional funding that is now in jeopardy.
Financial analysts warn that if the current restrictions persist, the state may struggle to pay salaries and pensions, potentially leading to a complete administrative standstill.
Kerala’s current Gross State Domestic Product (GSDP) stands at Rs 14,27,145 crore. Under existing fiscal rules, states are entitled to borrow up to 3% of their GSDP. Based on this, Kerala had requested a total borrowing limit of Rs 42,814 crore for the year. While Rs 29,529 crore was utilised or approved until December, the latest cuts have derailed the state’s remaining budget plans.
Furthermore, the Centre has withheld an additional Rs 3,300 crore related to public sector undertaking guarantees. Although the state government established a “Redemption Fund” to satisfy central requirements and unlock these funds, the Union government is yet to grant the necessary clearances. As the fiscal year draws to a close, Kerala finds itself in a high-stakes standoff with the Centre, with the livelihoods of thousands of employees and the progress of vital projects hanging in the balance.