Thiruvananthapuram: The Central Government has raised the borrowing limit of states from 3 per cent of the gross state domestic product (GSDP) to 5 per cent as part of the economic stimulus package announced in view of the COVID-19 pandemic.
This is in line with the Kerala government's demand to increase the borrowing limit to 4.5 per cent.
Facts and figures
The Centre’s announcement would enable Kerala to borrow Rs 18,087 crore this financial year, in addition to the Rs 27,130 crore allotted earlier. As the state has already borrowed Rs 8,930 crore, it is now eligible to receive Rs 36,287 crore. Meanwhile, the total debt of the state stands at Rs 1.71 lakh crore.
While raising the borrowing the borrowing limit, the Centre has placed some conditions but the state may not find it difficult to meet them.
One condition states that borrowed money should be used for developmental activities. Kerala normally spends almost 90 per cent of the borrowed money for meeting the expenses on salaries and pensions. A portion is set apart to repay previous loans also.
As a result, the state had formed the Kerala Infrastructure Investment Fund Board (KIIFB) to raise non-budget money for development work. This makes the state eligible to receive the entire Rs 42,217 crore allotted to it in case the Centre insists on imposing the conditions.
Benefits and concerns
Kerala’s tax revenue has not been meeting targets over the last three years. Moreover, as a consequence of COVID-19 , the state has suffered a revenue loss of around Rs 35,000 crore. With borrowing being the only option before Kerala, the increased limit is expected to give some relief to the state.
However, concerns remain. For instance, during the last three years, the Centre had reduced the borrowing limit in the latter part of the financial year. This year too, Kerala expects a reduction of Rs 8,000 crore.
Normally, while 50 per cent of the allotted amount can be drawn within the first nine months, the remaining amount could be availed as loan in the last three months of the financial year. Banks bid to grant loans to states through the e-Kuber portal of the Reserve Bank of India (RBI) as they are assured of returns.
Isaac welcomes move
Meanwhile, Finance Minister Isaac said that an administrative impasse can be avoided in the state after the Centre increased the borrowing limit. “However, an amount of Rs 18,087 crore meets only half the loss of Rs 35,000 crore suffered by the state following COVID-19. So, the Centre should release the full Goods and Services Tax (GST) compensation amount,” he said.
Moreover, the states should be allowed to borrow directly from RBI to enable a fair interest rate, he added.
However, there is still uncertainty over whether Kerala would withdraw the treasury restrictions even after receiving Rs 18,087 crore.
