Kerala eyes more borrowing despite being neck deep in debt

Experts said that the only way out is increasing non-tax revenue sources and divesting its shares in loss-making PSUs, not borrowing for K-Rail.

Published: 29th November 2021 05:06 AM  |   Last Updated: 29th November 2021 05:06 AM   |  A+A-

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Express News Service

THIRUVANANTHAPURAM :  Last week, a delegation of state officials representing K-Rail was busy negotiating a loan with Asian Development Bank officials in New Delhi. The offer was for USD 1 billion loan (approximately Rs 7,500 crore) for constructing a semi high-speed rail connecting Kasaragod and Thiruvananthapuram.

A few days ago, Japan International Cooperation Agency offered a loan of Rs 19,000 crore for the project. While ADB charges an interest rate of 1.5 per cent, JICA's rate is only around 0.5 per cent.

"But what the government conveniently forgets is the additional burden caused by the change in exchange rate over the period of repayment. One dollar was only Rs 45 in 2010. Think about a loan of USD 1 billion availed then and having a repayment period of 20 years. The Rs 4,500-crore loan availed is valued at Rs 7,500 crore after 11 years. That means, despite having a meagre interest rate, we have to repay a higher sum based on the rupee-dollar exchange rate at the time of repayment. Usually, we will end up paying 7 to 9 per cent as additional interest owing to changes in exchange value," said Francis Mathew, chartered accountant and former senior financial control specialist with ADB.

The plan for availing multi-billion-dollar loan is mooted by the Kerala government, unmindful of the fact that the state has already been neck deep in debt. As per the budget for 2021-22, the outstanding debt of Kerala will be Rs 3.27 lakh crore by the end of this fiscal.

Kerala's Gross State Domestic Product (GSDP) for the year is projected to be Rs 8.76 lakh crore. That means the outstanding debt of the state is equivalent to 37.3 per cent of GSDP. With the uncertainty created by the second wave of COVID and heavy rain, chances are high that GSDP will fall below the estimate, leading to a further increase in the debt-to-GSDP ratio.

"As per the Fiscal Responsibility Act of Kerala, 2011, sustainable debt level is estimated to be 23 per cent of GSDP. The level crossed 30 per cent in 2013-14 and was on an upward trend after that," said economist V Nagarajan Naidu, former head of economics department, Government University College.

He said that more realistic indices like the debt-to-revenue receipts (RR) ratio and debt-to-state's own revenue (SOR) ratio are also dangerously high. 

The debt-to-RR ratio for 2020-21 and 2019-20 was 318 and 290, respectively. The debt-to-SOR ratio for 2020-21 and 2019-20 ratio for 2020-21 and 2019-20 were 362 and 419, respectively. There are other factors too that show the state is in bad-debt category.

"Good debt is the practice of borrowing and investing the borrowed sum in projects which yield high return of investment. The return will outgrow the cost of borrowing in such cases. Bad debt is when you spend borrowed money for revenue expenditure such as giving salary and pension. Unfortunately, in the recent past, Kerala spends a lion’s share of its borrowing for meeting revenue expenditure and servicing debt," Mathew said.

During 2019-20, Kerala spent 75.6 per cent of borrowed money for revenue expenditure while 20.13 per cent was spent for repaying past borrowings. Only 3.85 per cent of the borrowed money was used for capital expenditure. In 2018-19, the respective figures were 84.3 per cent, 10.31 per cent and 4.19 per cent  respectively. "It is clear that we can’t go on like this for long," he said.

Kerala, along with Punjab and Rajasthan, was classified as a 'very high debt ratio state' in the states of growth report by Crisil in 2019. These were the only states where the debt-to-GSDP ratio had exceeded 30 per cent.

The argument of drastically reducing revenue expenditure to tide over this crisis is repeated by a section of economists. Reports of public expenditure review committees had given thrust on how to reduce government expenses including salary and pension.

"I think expanding our economy and increasing revenue are the sustainable solution. We have to outgrow debt by mobilising more resources. Instead, if you reduce the salary of employees, there will only be adverse effects. Firstly, it will affect the circulation of money in the society as employees will be forced to curtail expenditure. It will affect their morale and lead to inefficiency and chances for corruption will be higher," said Naidu.

He suggested increasing non-tax revenue sources by introducing fees for government services, other than essential services and an exponential expansion of service sectors like tourism and IT. Agreeing to the suggestion, Mathew said whatever the government can do to promote economic activity needs to be done immediately.

"Recently, Maharashtra and Karnataka governments announced stamp duty waivers for a selected period. It had a huge impact on the real estate sector there. A similar initiative will boost sale of land and apartments here too," he said.

Another suggestion mooted by Mathew is disinvestment of loss-making public sector companies. "I am not speaking about KSRTC, KSEB and KWA. Let them continue to be under government control. But, there are companies like Malabar Cements, Kerala Automobiles Limited and Kerala Soaps. Why can't we divest government shares in those companies? The money can be used to repay and restructure the state’s debt," he said.

'Disinvestment' is a cuss word in a Left-oriented state like Kerala. Mathew said there can be a Kerala model in divestment too by protecting the jobs of workers. "The government can set terms accordingly. Turning a blind eye to such a proposal at this hour of crisis won’t be good," he said.

What is Debt Sustainability?

Debt sustainability is the ability of a government to service debt including repayment of principal amount. Efficiency with which the borrowed funds are utilised and the capacity of state to honour its obligation by additional resource generation are key determinants of debt sustainability.

If the debt is not sustainable, the state will land up in debt trap by borrowing more funds to service past debt as well as to cover its ongoing fiscal imbalances.

Factors that hint Debt Trap

  • Debt-to-GSDP ratio: As per Fiscal Responsibility Act of Kerala, 2011, a sustainable debt should be below 23 per cent of GSDP. In 2013-14, the debt-GSD ratio crossed 30 per cent and the ratio remained above 30 per cent in following years. The ratio is set to cross 37 per cent this fiscal, as per budget estimates.

  • Debt-to-revenue receipts ratio: Last fiscal, this ratio was 318% and the year before that, it was 290%. That implies that the debt is thrice the revenue of the government 

  • Rate of growth of outstanding debt vis-à-vis rate of growth of GSDP: In the past five years, only in 2018-19, the rate of growth of debt was lower than the rate of growth of GSDP 

  • Average interest rate of outstanding debt: Interest rate showing a growing trend and was the highest in 2019-20. Higher interest rate means there is a scope for restructuring of debt 

  • Interest payments to revenue receipt ratio: The ratio increases year on year, indicating that significant portion of the borrowed funds is utilised for repayment of the portion of the borrowings and interest thereon 

  • Public debt repayment-to-public debt receipt ratio: This ratio remains very high. It was 35.78% in 2018-19 and 35.63% in 2019-20, indicating that greater portion of debt is utilised for debt servicing


Kerala's fiscal health has been a hot topic of debate among economists and politicians for the past few years. The latest audit report of CAG tabled in the assembly earlier this month warned that the state is heading for a debt crisis.

In the first six months of this fiscal, revenue deficit and fiscal deficit worsened beyond budget estimates. With no control over revenue expenditure and no new sources of revenue in sight, the LDF government is in a Catch-22 situation. The first part of the series that examines what is wrong with Kerala’s fiscal health. 

State's borrowings fall in bad-debt category as its outstanding liability is equivalent to 37.3 per cent of GSDP.


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