Recently, the Comptroller and Auditor General (CAG) of India has expressed concerns about the off-budget borrowings made by the Kerala Infrastructure Investment Fund Board (KIIFB). According to the CAG, these borrowings for critical infrastructure projects have bypassed constitutional limits on government borrowings under Article 293 (1) of the Constitution. The CAG is also of the view that such borrowings lack legislative approval.
Understanding Off-Budget Borrowings
Off-budget borrowings are a financial tactic used by the government to maintain fiscal deficit by enabling quasi-government entities to borrow on its behalf, partly funding its yearly expenditure plan.
Legal Provisions for Government Borrowings
Articles 292 and 293 in Part XII of India’s Constitution handle borrowing by the Central Government and states, respectively. The power to control or enable state borrowing and giving guarantees lies with the State legislatures as provided by Article 293(1). If a State Government is indebted to the Centre, it requires the latter’s consent to raise fresh loans, as per clauses (3) and (4) of Article 293.
Issues Raised by the CAG
The main issues pointed out by the CAG on KIIFB’s borrowings include bypassing the constitutionally set borrowing limit, encroaching the powers of the Centre, inadequate transparency, overburdening state finances, and the risk of escalating external liabilities. Concerns were also raised about the non-disclosure of these borrowings in Budget documents or accounts.
About Kerala Infrastructure Investment Fund Board (KIIFB)
Established in 1999, KIIFB’s primary objective is to fund critical and large-scale infrastructure projects in Kerala. It is recognized as India’s first sub-sovereign entity to access the offshore rupee international bond market with its ₹2,150 crore masala bond issued in 2019 on the London Stock Exchange.
Kerala Government’s Stand on KIIFB Borrowings
The Kerala government retorted the CAG’s claims stating that KIIFB funds were used for public infrastructure development. The government also commented on the unilateral nature of the report, showing concern over not being offered a chance to provide comments or observations before its publication. Furthermore, it displayed discontent saying KIIFB Bonds were raised with the Reserve Bank of India’s approval, questioning the unconstitutional tag.
The Role of RBI in State Borrowing
The Reserve Bank of India (RBI) is authorized to act as an agent for Central and State Governments for issuing and managing the latter’s bonds and debentures. The RBI’s Internal Debt Management Department extends Ways and Means Advances (WMAs) to the Centre and States and sets WMA limits.
Implications on Federalism
Federalism would be undermined if there isn’t a regulation mechanism for state subnational debt. Providing this could promote fiscal stability in the states. Consequently, the power granted to the centre by Article 293 should be confined strictly to its defined purposes and circumstances.
Suggested Way Forward
With state debt burdens escalating due to fiscal shocks like demonetisation, the GST introduction, and the Covid-19 crisis, a review of India’s sub-national fiscal policy is suggested. This could enable states for subnational borrowings, offering them more fiscal autonomy opportunities. The states’ rights to pass their Fiscal Responsibility Laws (FRLs) should be validated, supporting cooperative federalism. Any legislative concerns raised by the CAG concerning KIIB should be addressed collaboratively by the Centre and the Kerala government in public interest.
