Kerala’s Financial Crisis

Why in news?

Kerala government has approached the Supreme Court claiming the Centre’s borrowing limit restrictions violate fiscal federalism.                                                                                                                          

How the State’s borrowing is regulated in India?  

• Article 293- It grants fiscal autonomy to states, allowing them to borrow only from within the territory of India on guarantee from the Consolidated Fund of the State.
• 7^th Schedule- Fiscal matters are delineated in the 7^th  Schedule of the Constitution, with "Public Debt of the State" falling under the State List, giving states exclusive jurisdiction over this matter.
• FRBM Act 2003- The Fiscal Responsibility and Budget Management Act 2003 was enacted to ensure intergenerational equity in fiscal management, it sets limit on fiscal deficit and borrowing for both the Central and State governments.
• Finance Commission- It periodically makes recommendations regarding fiscal matters, including borrowing limits for States, it is crucial for determining the borrowing ceilings for states, taking into account factors such as economic conditions, fiscal health, and developmental needs.
• State Fiscal Responsibility Acts-Each State may have its own Fiscal Responsibility Act, which further defines the limits and guidelines for borrowing and fiscal management within the State.
• Role of Centre- It plays a significant role in overseeing fiscal matters, including approving borrowing limits for States based on recommendations from bodies like Finance Commission.
• It can influence the State’s borrowing limits through legislative changes, amendments to existing laws like the FRBM Act, or by exercising discretion in granting additional funds or relaxing borrowing constraints in exceptional circumstances.

Why Kerala is facing financial crisis?

• Fiscal deficit- Kerala has struggled to contain its fiscal deficit within the mandated limits.

The average fiscal deficit of Indian States is 2.5%, in 2021-22 Kerala’s fiscal deficit was 4.17%

• Debt servicing- The state’s borrowing is used for ongoing expenses rather than profitable investments, affecting its credit rating.
• Revenue generation- The State’s revenue generation may not be sufficient to meet its expenditure requirements, the State relies heavily on revenue from taxes including GST but fluctuations in economic activity and external factors impact tax collections.
• Expenditure patterns- There is high levels of recurrent expenditure on items like salaries, pensions and subsidies which contributes to financial strain.
• Natural disasters- Kerala is prone to natural disasters such as flood, landslides etc., which can cause widespread damage to infrastructure and disrupt economic activities.
• Impact of pandemic- COVID-19 pandemic has exacerbated Kerala’s financial challenges, the economic slowdown resulting from lockdowns and restrictions has affected revenue streams while increasing healthcare and social welfare spending have added to expenditure pressures.

What is the stand of Kerala and Centre?

References

1. Indian Express- Decoding Kerala’s financial crisis
2. Indian Express- SC suggests one time package for Kerala