In July, Keralam’s newly elected UDF government set up an expert panel to review the functioning of Kerala Infrastructure Investment Fund Board (KIIFB). The panel, headed by a former civil servant, was tasked with recommending measures to restructure KIIFB and strengthen the government’s institutional capabilities, among other things. The committee has recently submitted its report, which has been tabled in the State Assembly.
Apparently critical of KIIFB’s functioning, the committee has recommended winding it up; absorbing its functions and capabilities into the State government, news reports say. The principal reason for the panel’s recommendation is that with the clubbing of KIIFB’s borrowing function with the State budget, the special purpose vehicle (SPV) has lost its primary purpose.
A disputed investment model
KIIFB, restructured by the LDF government, reportedly boosted the State’s infrastructure investment by raising extra-budgetary resources, including securing soft loans known as “Masala Bonds” from international agencies after the disastrous floods of 2019. However, the SPV’s functioning and financial performance have remained contentious. The comptroller and auditor general’s (CAG) strictures against KIIFB have become a convenient beating stick for the Centre and the Opposition parties in the State. Leftist critics have branded it as the arm of “the Left Managerial State” for promoting controversial projects, bypassing legislative approvals. In the fog of the debate, KIIFB’s original purpose and economic principles underlying it seem to have been lost sight of. We seek to explain them, intending to shed some light on the contentious issue.
Though Keralam has sound traditional transport infrastructure such as road network and rail connectivity, it lags behind in modern facilities, such as high-speed railways or highways, especially when compared to the neighbouring States. Keralam reportedly spends a mere 1.5 per cent of the Gross State Domestic Product (GSDP) on infrastructure. This was so in spite of Keralam’s own-tax revenue to GSDP ratio being among the highest among major States, as per the RBI data.
KIIFB was set up in 1999 and underwent a major restructuring in 2016; the institution’s record in expanding public goods is apparently well acknowledged. However, its functioning raised many queries. The CAG found that the SPV’s finances flouted its procedural audits, which became a sticking point between the Centre and the State. Moreover, as KIIFB functioned outside the purview of the State budget, without generating financial profits from its lending, its borrowings being serviced out of the State’s revenue became the heart of the contention.
Rationale for off-budget borrowing
In the good/bad old days of “planning”, State finances broadly followed the “gap-filling” approach; meaning the Centre made up the difference between a State’s projected revenue growth and its “developmental needs” as per the State plans. It was a negotiated process, part financial and part political. Evidence shows that richer and politically influential States got the lion’s share of the divisible pool of the plan resources.
The Fiscal Responsibility and Budget Management Act (FRBM) 2003 changed that by seemingly imposing a “hard budget constraint”, with the fiscal deficit capped at 3 per cent of GSDP. The RBI now monitors the size of the State debt. The coupon (interest) rate of the State loans depends on the State’s debt sustainability measures. The hard budget constraint has reportedly improved State finances, or at a minimum, made them transparent.
However, most States have devised a variety of means for securing extra-budgetary resources, or off-budget borrowings (OBBs) – as evident from the RBI’s compilation of State finances. The CAG, tracking OBBs, finds that there is a bewildering variety of them. And the actual OBBs are far higher than what it is able to count, as per its own findings. In other words, ensuring fiscal discipline seems like a cat-and-mouse game between the Centre and States. Incidentally, Keralam is not among the worst offenders.
Globally, a variety of financial institutions and fiscal arrangements have existed outside of the budgetary process. Numerous kinds of para-statal organisations are a feature – not a bug – of the fiscal landscape, especially among fast-growing Asian economies. China, for instance, has a bewildering variety of financial arrangements that enable provinces to draw resources from the national development banks to sustain employment at the local level, augment production and exports and ensure political stability. No wonder, China’s public debt to GDP ratio is nearly 300 per cent – though most of it domestic.
Then, realistically, what should be the rules for managing extra-budgetary resources and institutions for Keralam? Simply speaking, if extra-budgetary resources are productively used and they comply with the government expenditure principles, having such off-budget institutions/borrowings may not be undesirable. This follows the Domar rule: so long as the output growth rate exceeds the interest rate on such loans(either at current or at constant prices), they are being used productively. Since such investments have a public good character, individual projects may not be yielding adequate revenue or covering the full costs. However, if in the aggregate they contribute to growth in state output (GSDP) and follow the Domar rule, then such investments are in principle viable.
However, if the State-level SPVs borrow from external sources for social purposes or green financing, which usually have lower interest rates for longer maturities, they need to be assessed differently, as they involve exchange rate risk. Given Keralam’s fragile ecology and need for substantial low-cost resources for protecting it, external borrowing for such purposes by creating SPVs may be desirable, as KIIFB reportedly proved to be after the floods in 2019. The expert committee’s recommendation to dissolve KIIFB is the easier part. In the present political milieu, efforts to boost public investments to catch up with the neighbouring States are a harder job – with the Centre strictly monitoring Keralam. The State will have to devise newer and administratively innovative means to tap OBBs, as most States do. The task is primarily a political one.
(R. Nagaraj is an economist.)
Published – October 28, 2026 07:00 am IST
