Experts are of the view that the conditions put in place for borrowing limits should be based on efficiency indicators and not policy related.

Man in blue shirt holding five hundred rupees notes Image for representation
news Finance Wednesday, May 20, 2020 - 20:15

With the Centre increasing the borrowing limit of states to 5% of state GDP, Kerala Finance Minister Thomas Isaac, who has been vocal in asking for this, has welcomed the Centre’s move.

This comes after the Centre, in July 2019, cut Kerala’s borrowing limit for the ongoing financial year to the tune of Rs 6,000 crore. The decision taken solely for Kerala was because the state accepted deposits to the tune of Rs 6,000 crore to its treasury. This move had aggravated the financial crisis the state had been trying to tide over.

Cutting borrowing limit has aggravated financial crisis: Kerala FM Thomas Isaac to TNM

TNM spoke to experts on how it would help the state to revive the economy that suffered huge setbacks with the two deluges consecutively in 2018 and 2019.

“It would be useful if it's a small relief to the government, this is something the state government was demanding from day one,” R Ramkumar, member of state Planning Board told TNM.

“This is a move that increases our fiscal space, but not sufficient enough to cover up the loss in revenue,” KN Harilal, another member of the Planning Board told TNM.

“But it’s not sufficient to cover the huge revenue loss caused by the COVID-19 situation,” he added.

Both economists are experts on the state’s finance. Ramkumar is a member of the three-member panel appointed by the government to study the impact of the COVID-19 and the lockdown followed by public finances and various other sectors of the state.

While both economists welcome the increase in borrowing limit, they said that the conditions that follow are worrisome.

The incremental borrowing limit beyond 3.5% of the Gross State Domestic Product will be linked to reforms undertaken by the states, including universalization of One Nation, One Ration Card.

“Only 0.5% of it is unconditional or untied, and the remaining is subject to conditionalities. Certain things like one ration or one nation card are not a problem for the state because we are ahead of the nation in such things. But in particular issues like power sector reforms, the Kerala State Electricity Board is a profitable institution unlike the trend in other states and we shall not abide by the Centre guidelines and we don’t want to. Ideologically too, we are opposed to such a framework,” Ramkumar said.

Ramkumar is of the view that even if the state is ideologically opposed to certain things, if the final set of conditionalities were a set of efficiency indicators, the state would have explored the best possibility to achieve that level of efficiency.

“Instead of saying you should or shouldn’t have this or that kind of policy, if the conditionalities were in the form of certain indicators of efficiency that the state necessarily needs, then we would have tried to explore it. We are open to increasing efficiency, but we would like to do it in our way. To say privatization is the only process through which we can attain efficiency is where we disagree,” he said.

“What is happening is that the Centre views this crisis as an opportunity to force upon states certain neo liberal reform measures that are contentious. We don’t think this is the right time to do it. This is the time to provide relief to people and not take structural reform measures. Once the crisis is over, they can discuss with the states what all can be done,” Ramkumar added.

The Centre is yet to give Kerala the GST arrears that roughly add up to around Rs 2,000 crore.

“If the GST arrears had been given, we would have had more breathing space and could have avoided some borrowing or saved the borrowing for a later time. But instead, the Centre is giving money in small drops,” he said.

“In a crisis situation like this, the Centre should have gone for a decision that would back up the economy rather than offering everything, even loans, with conditions,” Harilal said.

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