LI Network
Published on: February 8, 2024 at 14:00 IST
Attorney General R Venkataraman informed the Supreme Court that Kerala’s financial health and debt scenario have garnered critical evaluations from successive Finance Commissions (12th, 14th, and 15th), as well as the Comptroller and Auditor General of India (CAG).
According to a note submitted to the court, Kerala is positioned as one of the most financially unsound states, exhibiting multiple vulnerabilities in its fiscal structure.
In response to the legal action initiated by the Kerala government, the Central government, through an affidavit, notified the apex court that Kerala’s fiscal foundation is riddled with issues, as highlighted by various Finance Commissions, the CAG, and the Reserve Bank of India (RBI).
The Attorney General’s written note in the Kerala government’s lawsuit emphasized the impact of state debts on the country’s credit rating, asserting that any default in debt servicing by a state could lead to reputational concerns and potentially jeopardize India’s overall financial stability.
Citing reports from the 12th Finance Commission, CAG, and RBI, the note underscored Kerala’s precarious financial condition. The 12th Finance Commission, in particular, categorized Kerala among states experiencing a deteriorating debt situation, evident in both the Debt-GSDP ratio and the ratio of interest payments to revenue receipts.
The RBI has also identified Kerala as one of the five highly stressed states requiring urgent corrective measures, the Centre added. The affidavit noted that Kerala’s own white paper, published in June 2016, acknowledged the acute financial crisis, indicating insufficient funds for capital expenditure and highlighting poor public finance management.
The Centre, analyzing Kerala’s current financial situation, pointed out poor public financial management through various indicators. The state’s outstanding liabilities as a percentage of Gross State Domestic Product (OSDP) increased from 31 percent in 2018-19 to 39 percent in 2021-22, exceeding the all-state average of 29.8 percent.
Interest payments as a percentage of revenue receipts in Kerala climbed to 19.98 percent in 2021-22, surpassing the 14th Finance Commission’s recommended 10 percent.
This response comes within the context of the Kerala government’s legal petition against alleged interference by the Centre in the state’s finances, contending that such interference hampers the state’s ability to fulfill its commitments outlined in annual budgets.
The state argues that the Centre, through amendments to the Fiscal Responsibility and Budget Management Act of 2003, has imposed a net borrowing ceiling on Kerala, limiting its borrowing capacities from all sources, including open market borrowings.