The Burden of Borrowing

The Masala Bonds will get Kerala Rs 2,150 crore to spend on infrastructure and the state will have to pay Rs 1045 crore in interest in the next five years. If debt servicing plans through petroleum cess and motor vehicle tax go awry, then the state will be forced to plumb for tough options such as user fee.

What are the implications of the KIIFB bonds issue for the state exchequer and the people? The most apparent is the massive interest burden it entails. On the present borrowing of Rs 2,150 crore, the state would have to shell out, every year, Rs 209 crore solely by way of interest. By the end of the five-year maturity period, it would have incurred an interest burden of Rs 1,045 crore, that is, nearly half the amount of the principal.  This clearly marks a huge economic drain.
The interest payments, scheduled to be made every half-year, would be sourced from motor vehicles tax and cess on petroleum products. The consequent, increased cost of transportation would adversely affect all classes of people directly and through inflationary impact. The burden of user levy on the projects also directly falls on the people. If the ear-marked sources fail to generate sufficient revenue, a search for other sources of income would be inevitable for debt servicing. This could take such forms as increased tax rates, new taxes and a widened tax net.

Another threat is the self-reproduction of debt. This is to say that, to avoid a default in servicing the present KIIFB debt, the government borrows more, either through the KIIFB or through other means, multiplying thereby the interest burden, triggering a larger set of revenue extraction measures.

The precarious fiscal status of Kerala, already burdened by persistent revenue deficit and high public debt, casts doubts on its capacity for further debt servicing.  The two declared sources of funds for debt servicing, as noted, are the cess on petroleum products and the motor vehicles tax. While the entire income from petroleum cess would be committed to debt servicing, the share of motor vehicles tax is schematised, beginning with a 10 per cent share in 2017-18 and rising up to 50 per cent in 2022. To receive such income and to apply it for debt servicing, two funds have been created. The first, the debt service reserve account, is for making interest payments, while the second, the sinking fund account, is meant for redemption of principal. The government, however, admits that "such amounts will not be sufficient to satisfy its entire obligations in respect of the notes". It further acknowledges that any decrease in the motor vehicle sales volume or in the consumption of petroleum products owing to the emergence of alternative options of fuel power or the introduction of new means of transportation or a fall in petroleum product prices would have a material impact on cash flows.  

The government recognises that situations might arise, where it would have to make "appropriate alternative budgetary allocations". This is to say that the government would have to sanction grants or loans to the KIIFB to avoid default in debt servicing, at least till such time as the KIIFB begins to recover the loans and secures steady returns on the investments.

Furthermore, mega infrastructure projects as planned by the KIIFB would involve land acquisition, the costs of which could be astronomical, considering the population density and land prices in Kerala. The RBI regulations specifically state that the proceeds of Masala Bonds shall not be used for meeting land acquisition expenses. The KIIFB would need loans or grants to meet such expenditure.

Considering that Kerala's past budgets have shown persistent deficit, it remains to be seen how the government would find surplus funds to disburse grants or loans to the KIIFB. Where will the surplus money come from? The state's own tax revenue that forms about 60 per cent of the revenue receipts is faced with serious constraints owing to the introduction of GST. The non-tax revenue, which contributes about 10 per cent of the revenue receipts, rests on a narrow base of income from the state lotteries and services rendered by government departments. Central transfers comprising tax share and grants-in-aid that form about 30 per cent of the receipts fall outside the realm of control of the state government. On the other hand, there is hardly any room for reduction of expenditure. Nearly 60 per cent of the revenue expenditure is spent on salaries, pension and interest, which form a committed liability.

In sum, unless an economic miracle happens, consequent to the KIIFB model or otherwise, the government would have to impose ever-increasing taxes and hike the user levy on infrastructure projects to service the debt. This is bound to draw the people into a sharp conflict with the state.  

Infrastructure, Social Equity and Environment
Is the KIIFB model of infrastructure development an inevitable concomitant of the neoliberal policy of the national government? While it is true that macroeconomic priorities and biases cause restrictions on policy making at the sub-national level, there is room for selective delinking and creation of autonomous 'regionalities'. Such alternative thinking and strategies are all the more expected of a leftwing party and government which are persistently critical of the centre's neoliberal development paradigm. The possibility of alternative geographies of development is exemplified by Kerala itself, where community-based development and welfare initiatives, including local self government and self-help groups, despite limitations, were the order of the day during the 1990s and 2000s. The failure to carry forward and expand such initiatives but to depend, instead, on external borrowing and immigrant capital owes to the erosion of the political will of the party. The present choice of easy options of governance and an increasing preference for vanity projects that cater to the needs of a minority clearly point to this erosion. Probed further, this would reveal the changing class composition and economic interests of the party.

Be that as it may, several other important questions crop up. How justified is the creation of 'para governmental' institutions to undertake massive public expenditure? Is inadequate infrastructure the most critical constraint on Kerala's development? Would greater investment in infrastructure necessarily mean economic growth? What kind of economic growth is envisaged by investing in large infrastructure projects? Is it not fairly well-established that the linkages of mega infrastructure projects are mostly external to the domestic economy, and are often global? Given the limited, possible multiplier effects on local income, employment and consumption, can the large-scale borrowing at the proposed steep rate of interest, be justified? Besides the huge direct costs of debt servicing, what are the other costs involved? Would not mega infrastructure projects cause large-scale displacement in a thickly populated land like Kerala? What would be its effect on livelihood, income and employment of the marginalised people? Considering that much of the new construction would be on the wetlands and the coast, what price would such activities as agriculture and fisheries have to pay? Would not the execution of mega infrastructure projects lead to huge demands being placed on construction materials and involve ruthless destruction of environment? Can Kerala's fragile ecology, already much ruined by the razing of hills to excavate red earth, the mining of river banks for sand, and the widespread quarrying for granite, afford to tolerate more? Given the rapid depletion of natural resources within the state, would the neighbouring states also fall a victim now? Would not mega infrastructure projects with their devastating effects on the landscape and generally poor aesthetics negatively affect the prospects of income from the tourism sector, which the government has identified as a key component of future growth? Why should the people bear the costs, monetary and otherwise, of a development programme that is fundamentally antithetical to their interests? Clearly, what is required is a socially equitable, environmentally sustainable, and financially viable policy of infrastructure development. Regrettably, the KIIFB projects, as conceived now, do not conform to these parameters.
(Concluded)