How Keralam can overcome its legacy infrastructure deficit

Keralam has been universally hailed for its social sector investment and achievements. In contrast, the infrastructure of the State has woefully been lagging behind. This backwardness is a major impediment to industrial investment in the State. The public investment in infrastructure has been inadequate. Even during the current year, after substantial raise in the capital expenditure in the revised Budget of the UDF government, the capital expenditure to GSDP ratio of the State is only 1.34% whereas the all-State average would be nearly 3%.

This wide gap in capital expenditure between Keralam and other States has been persisting over the past five decades. Overcoming the consequent infrastructure deficit is a key challenge to Kerala’s development. The accumulated gap cannot be overcome within a reasonable time frame by budgetary resources alone. However much the current UDF government makes an effort in this direction, they are not going to succeed if they remain faithful to their ‘Indira Guarantees.’

Imbalance of federal system

My major quarrel with the expert committee that looked into the Kerala Infrastructure Investment Fund Board (KIIFB) is that it seems to totally ignore the above vital issue. For me, finance is a tool to pursue the societal development goal, pushing the federal system’s constraints to the limits possible. The committee exhibits no concern for the severe imbalance of the Indian federal system and the imperative need for a State like Keralam, which pursues a different development paradigm, to manoeuvre within the federal system to take forward its project.

May I quote from the last Budget (2011-12) at the end of my first term as a Finance Minister: “Let me place before you an alternative approach to get over the stubbornness of the Central Government in adhering to the tenets of a conservative fiscal policy. Instead of the Government borrowing directly, autonomous Boards or Companies controlled by the Government should raise loans and restore the road network. The Road Fund Board and the Roads and Bridges Corporation would carry out this responsibility…….

Secondly, the Road Fund Board and Roads and Bridges Corporation have to achieve the credit rating required to generate enough confidence in the market to lend ₹40,000 crore to these organisations within a period of 10 years. For this, three to six months of revenue from the motor vehicles’ tax every year shall be deposited in an escrow account through legislation….“

Chandy’s surprise

The proposal received only sarcastic comments from the Opposition. And nothing happened in the next five years under the UDF government. But in the 2016 Budget, Oommen Chandy sprang a surprise: “The Kerala Infrastructure Investment Fund will be reorganised to mobilise ₹30,000 crores for the development of basic infrastructure of Kerala.”

Hoping to achieve a bipartisan consensus, in the revised Budget for 2016-17 presented a few months later by me, KIIFB was selected as the special purpose vehicle for resource mobilisation. A detailed scheme for the reorganisation of KIIFB and a long list of major infrastructure projects that would be financed by it in the first phase was announced. Half the motor vehicle tax and petrol cess was guaranteed to KIIFB. It, in turn, securitised its future revenue flow and financed the projects announced in the Assembly. Legislation unanimously passed by the Assembly ensured the exclusive use of funds for infrastructure, oversight mechanisms, and accountability.

The achievements of KIIFB in the last one decade have been remarkable. It sanctioned projects worth more than ₹1 lakh crore and leveraged investment valued at more than another lakh crore rupees, particularly on national highways. If the scheme was taken forward, Keralam would have become a front tracking State in infrastructure in another decade.

Centre’s intervention

It is at this juncture that the Union government intervened, alleging violation of Article 693 and infringement of FRBM Act and deducted from Kerala’s borrowing space the loans taken by KIIFB with retrospective effect. It seriously affected the State’s budgetary balance. Keralam countered by filing suit in the Supreme Court and initiating steps to convert KIIFB into arevenue-generating financing institution.

Already 20%-25% of the KIIFB projects are revenue-earning. Other projects also can be remodelled. The grants to KIIFB would become viability gap funding from the State government or lease rent paid by the State government for the facilities created by KIIFB. Service fees for the revenue-earning projects can be kept very low by long-term recoupment period.

But all such resistance to the unilateral actions of the Union government or modification of the KIIFB model has been foreclosed with the expert committee conceding all charges levelled by the Union government against KIIFB and the Cabinet accepting the report. KIIFB’s fate has been sealed and its future activities will be limited to completion of ongoing projects, with the government providing the finance as repayment of loans or as contractors’ bill payments.

The tragedy is that neither the committee or the government has provided any alternative to keep up the momentum of infrastructure investment in the State. Despite all the nit-picking of procedures and rules, KIIFB has been a remarkable development institution bringing in much needed efficiency and modernisation into governance. Scraping it will be a major policy blunder which will push back the State at least by a decade.