Increased intervention on the part of states on various developmental and welfare oriented activities without a commensurate growth of resource to meet them, invariably leads to a situation of growing public debt. In Kerala, it has been accelerated by the factors such as low growth of revenue receipts, stagnation of economic growth, underdeveloped and inefficient private sector as an alternative development agency, periodical political cycles and traditional ‘state dependent’ psyche of people. Is it rational to increase expenditure by resorting to more public borrowing? Though public finance pundits might rationalize it by present lower share of public expenditure to GDP in India and its probable future innumerable multiplier and other backward and forward linkages created in the society, the existing fiscal conditions of the state does not support it unconditionally.
The trends in fiscal variables as given in Table 1 shows the dismal performance of revenue receipts as compared to expenditure that led to the growth of revenue and fiscal deficits at a very high rate. Public debt and other liabilities grew at a rate of 12 percent during this period. Per capita debt is increasing at a high rate every year. Even the current allowable limit of borrowing ie, 3 percent of GSDP or Rs 18,000 crores is not sufficient to meet the obligatory state expenditure. It is natural for the state to probe into alternative methods of resource mobilization such as creation of Kerala Infrastructure Investment Fund Board (KIIFB), setting up new bank with modification of existing cooperative banking structure, mobilizing NRI funds etc. The mute question is that have we thought about the sustainability of these debt funds in a state of Kerala where percapita debt liability is highest in the country.
Debt sustainability implies the ability of government to service debt including repayment of principal amount. It depends on efficiency with which the borrowed funds utilized and the capacity of the state to redeems its obligation by additional resource generation. Otherwise, the state, not only default its obligation, but also land up in debt trap by borrowing more funds in order to service past debt as well as to cover its ongoing fiscal imbalances. The international experiences of debt ridden countries of Latin America and Europe provide warning signals to us.
Status of debt sustainability
The profile of debt structure of the state has got transformation. The share of internal debt has increased and within it, the share of market loans and special securities issued by the govt has increased. At the same time the shares of central govt and financial institutions witnessed drastic decline. It highlights the state’s withdrawal from the sources which have more flexibility for future negotiations. A common yardstick used for evaluating debt level is GSDP and accordingly, the debt-GSDP ratio is 30.03% in 2013-14. It is greater than the sustainable debt level of 23%, which is estimated as per the Fiscal Responsibility Act of Kerala, 2011. More realistic yardsticks are revenue receipts (RR) and State’s own receipt (SOR). In 2013-14, the ratio of debt to RR and SOR are 242% and 314% respectively and these ratios are very high among other states in India. Future debt redemption will be adversely affected if these ratios rise beyond a level. Many indices are available for debt sustainability. Though these indices are not unidirectional, they provide certain benchmark for policy prescriptions. One such index is Debt Stabilization Fund, which is equal to the sum of quantum spread and primary deficit. Quantum spread is the allowable limit of annual debt liabilities which is equal to a proportion of existing liabilities. The allowable rate is the difference between the growth rates of GSDP and the average interest rate.
This rate is known as Domar gap. Until and unless the primary deficit (ie, debt for meeting current revenue deficit) is within the allowable quantum spread, the debt is unsustainable. However, the trend indicates that the primary deficit exceeds the allowable limit which results in negative debt stabilization fund. As the average interest rate is almost fixed, the increase in primary deficit can be counteracted only through an increase in the growth rate of GSDP, if debt level to be managed at a sustainable level. Adequacy of incremental non-debt receipts to cover the incremental interest liabilities and primary expenditure is another index for debt stabilization. It is termed as resource gap, which has been negative in the state for many years. The percentage of net available fund to total debt and other liabilities is another measure. It is just 14% in 2013-14. Also a large share of revenue receipt is utilized for interest payment, which comes to 16.81% in 2013-14. This deprived the availability of revenue receipt for other productive expenditures.
The efficiency in utilization of borrowed fund is another indicator. As on March 31, 2014, the state government has invested Rs 5,623.61 crore in statutory corporations, government companies, joint stock companies, and co-operatives. The average return on these investments was just 1.46 per cent in the last five years while the government paid an average interest rate of 7.24 per cent. In addition, the government has also been providing loans and advances to many institutions/organizations. The estimate shows that the interest received against these loans remained less than one percent during the last five years. At the same time the cost of borrowing was between 6.1 and 9 percent. The difference between the interest paid by the government for obtaining the borrowed funds and the return on investment indicates the inefficient utilization of the borrowed funds. This may affect future redemption of principal as well as interest payment of the state.
The ratio of revenue deficit to fiscal deficit indicates the extent to which borrowed funds are utilised for current consumption. During 2013-14, 67% of fiscal deficit are utilised for meeting revenue deficit, mainly for committed expenditure such as salary, pension and interest payment. At the same time the capital outlay was just 25% which adversely affects the capital base of the state and its future growth potentiality. Though the State government has constituted a Consolidated Sinking fund for redeeming its open market borrowings and loans, no transfer of fund was made to this Fund from the revenue receipts in recent years. The resource gap to this Fund increases as time elapses, which may adversely affect the redemption of past debt on a stable manner. Also, the maturity profile of the debt highlights that the government will have to repay its 46.4 percent of liabilities in 1 to 7 years. A well thought out debt management strategy is needed to ensure that no additional borrowings, which mature in these critical years, are undertaken.
The state cannot keep away from additional resource mobilisation through borrowings in the present juncture. However, we cannot ignore the issue of debt sustainability. A multi pronged prudential fiscal management touching revenue, expenditure and debt is needed. In addition to the stress on improving the internal revenue generation capacity of the state, the effectiveness of public expenditure and the utilisation pattern and management of borrowed funds need a critical scrutiny. A cost effective outcome-based scientific fiscal administration is the need of the hour.
(The writer is Head and Associate Professor, Dept of Economics, University College, Thiruvananthapuram)
