On the Question of KIIFB’s Future, Pg8

Key Highlights:

• An expert panel has recommended winding up the Kerala Infrastructure Investment Fund Board (KIIFB).
• The panel cited the clubbing of KIIFB's borrowing with the State budget as the primary reason, leading to a loss of its original purpose.
• KIIFB was restructured in 2016 by the LDF government to raise extra-budgetary resources for infrastructure, including Masala Bonds.
• The Comptroller and Auditor General (CAG) had previously raised strictures against KIIFB's functioning and finances.
• Kerala's infrastructure spending is reportedly 1.5% of Gross State Domestic Product (GSDP), despite having high own-tax revenue.

Detailed Insights:

• The newly elected UDF government in Kerala formed an expert panel in July to review KIIFB's functioning and recommend restructuring measures.
• The panel's report, now tabled in the State Assembly, suggests absorbing KIIFB's functions and capabilities into the State government.
• KIIFB was established in 1999 and significantly revamped in 2016 to mobilize funds for critical infrastructure projects in Kerala.
• Its financial performance has been contentious, with the CAG noting procedural audit flouting and concerns over its borrowings being serviced from state revenue while operating outside the State budget.
• The Fiscal Responsibility and Budget Management (FRBM) Act, 2003, imposed a hard budget constraint, capping fiscal deficit at 3% of GSDP, prompting states to use Off-Budget Borrowings (OBBs).
• Off-Budget Borrowings (OBBs) are loans taken by government entities or Special Purpose Vehicles (SPVs) on behalf of the government, often not included in official fiscal deficit calculations.
• The article suggests that OBBs can be viable if productively used and if output growth rate exceeds the interest rate on such loans, following the Domar rule.
• The expert committee's report highlighted that KIIFB's liabilities for loan repayments and project completion stand at ₹70,415.54 crore, with repayments continuing until 2041-42.
• The report noted that funds borrowed at high interest rates remained unused for months, and Masala Bonds led to an extra expenditure of ₹181.73 crore.
• Since 2022, KIIFB's borrowings have been included in the state's borrowing limit, leading to the Centre cutting Kerala's borrowing limit by ₹25,932.55 crore.

Key Concepts Involved:

• Kerala Infrastructure Investment Fund Board (KIIFB): A statutory body established in Kerala to mobilize funds for infrastructure development from outside the state revenue.
• Masala Bonds: Rupee-denominated bonds issued outside India by Indian entities to raise funds from international markets, with currency risk borne by foreign investors.
• Fiscal Responsibility and Budget Management (FRBM) Act, 2003: An Indian law aimed at ensuring fiscal discipline, reducing deficits, and promoting transparency in government finances.
• Off-Budget Borrowings (OBBs): Loans obtained by government entities or Special Purpose Vehicles (SPVs) on behalf of the government, often excluded from official budget calculations.
• Domar Rule: An economic principle suggesting that public debt is sustainable if the nominal economic growth rate exceeds the nominal interest rate on the debt.