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Interest payments on Kerala’s debt soaring, Centre informs SC why it capped borrowing limit

The Centre informed the Supreme Court that Kerala will soon experience a severe financial crisis citing the state's rising interest payments on its debt. The report comes a day ahead of Kerala's budget presentation scheduled on February 5.

Interest payments on Kerala's debt soaring, Centre informs sc why it capped borrowing limit anr
First Published Feb 4, 2024, 4:00 PM IST

New Delhi: Kerala will soon experience a severe financial crisis, the central government told the Supreme Court, citing the state's rising interest payments on its debt. The state government's borrowing partners, Kerala Social Security Pension Limited and KIIFB, have no independent sources of revenue, according to a note the central government submitted to the Supreme Court. Along with Punjab and Bengal, Kerala is the state with the worst fiscal management in the country. It stated that borrowing was 31 percent of the GDP in 2018-2019 and increased to 39 percent in 2021-22. 

In response to a suit that the Kerala government had filed in the Supreme Court challenging the Centre's cap on Kerala's borrowing limit, the central government was responding. The 14th Finance Commission recommends that interest payments never exceed 10 percent of total revenue. However, in Kerala's situation, the interest the state is currently paying will come to 19.98 percent of revenue. The Centre further emphasised that the state is utilising the borrowed funds to pay for ongoing expenses, such as paying salaries and pensions, rather than investing them in profitable ventures.

The government of Kerala is spending a lot more money. The state set aside 78 percent of its revenue income for expenditures between 2018 and 2019. This increased to 82.4 percent in 2021–2022. This is the country's highest rate for any state. During the same period, the fiscal deficit also increased significantly. The fiscal deficit increased dramatically from 2.4% in 2017–18 to 3.1% in 2021–2022.

The union government blamed Kerala's borrowings outside of the budget as well. It should be mentioned that, from 2021 to 2022, government allocation made up 93.6 percent of KIIFB's total income; the interest from the fund board's assets made up the remaining 6.40 percent. Additionally, the note mentioned that KIIFB will get the funds collected from the motor vehicle tax and petrol cess.

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