Kerala not in 'debt trap'; RBI article failed to study ground realities: FM Balagopal

Asserting that Kerala is not in a "debt trap", Finance Minister K N Balagopal on Sunday said a RBI article that expressed concerns over the state's financial health was done without studying the ground realities.

Critical of the Reserve of India (RBI) article as well as the overall approach of the central government, Balagopal, also a senior leader of the state's ruling Left front, said Kerala is facing financial difficulties like any other Indian state and those can be managed only with collective efforts of the Centre and states.

As the RBI write-up evoked mixed response after it called for corrective steps in five states including Kerala, Balagopal said those who prepared the report did not take into account the difficulties faced by his state due to outbreak of COVID-19 and Nipah and natural calamities like floods in 2018 and 2019.

"As far as Kerala is concerned, we are not in a debt trap...We have difficulties in finance just like many other states," the minister told PTI.

Balagopal said he expects that this year would see a remarkable improvement in the financial sector.

"This year we are expecting more improvement. Our finances are not at a dangerous level. We are 100 per cent sure that we can proceed with growth," the minister said but made it clear that for helping the states, the Centre has to change its approach.

Urging the union government to provide the states their justifiable share of the revenue, Balagopal said the Centre has not decided yet on their demand for extending the GST compensation beyond June.

Referring to the RBI paper which said Kerala, along with two other states, is projected to exceed the debt-GSDP ratio of 35 per cent by 2026-27, he pointed out that the central government's debt-GDP rate was much more than that.

Noting that borrowings have never pushed the state into a financial crisis, Balagopal said the state's borrowing rate was 3.4 per cent last year despite the borrowing limit fixed by the central government was 3.5 per cent of the Gross State Domestic Product, whereas the Centre's borrowing rate was 6.9 per cent of the GDP last year, which according to him, was much higher.

Balagopal said curtailing the government expenditure for the sake of financial prudence will not help revive the economy.

He alleged that instead of taxing the richest people, the central government was providing tax relief for big corporates and "such financial policies create big difficulties in the country's economy and to repair that damage it was forced to squeeze the employment opportunities for millions of youth and introduce a contract system for them in recruitment to the armed forces." Asked whether financial crisis was the reason for the change in policy in recruiting youngsters in central government jobs like the new Agnipath scheme of the armed forces, he said such financial policies of the Centre have resulted in protests in the country.

Balagopal, however, claimed that the civil service system in Kerala was very strong and the Left government in the state, despite facing financial difficulties, takes every step to ensure that a robust system is in place for serving the people.

Seeking to counter the claim made in the RBI paper, the minister said the government could control inflation in the state through a strong public distribution system and effective government intervention in the public market.

Citing the latest data, Balagopal said the consumer price index (CPI) declined from 5.1 in April to 4.82 in May, which according to him, is remarkable as the national average of the CPI was 7.04.

He said the RBI team failed to consider the financial situation of the state during the outbreak of COVID-19 and Nipah virus and two back-to-back floods of 2018 and 2019 while preparing the report.

"This is a COVID period financial situation. Actually, we spent a lot towards re-construction including two packages of Rs 20,000 crore each and Rs 5,800 crore package for the business-pharma sector.

All these expenses are there. And during the COVID-19 period we were able to supply free food kits to every household. Such initiatives were undertaken at a time when there was a complete lockdown due to which the entire market was affected.

"Even before the outbreak of COVID-19 we had to deal with issues arising out of natural calamities and we spent a lot for reconstruction of the state", the minister added.

Echoing the words of his predecessor and senior CPI(M) leader Thomas Isaac, the minister said providing a stimulus package to Kerala to invest in capital expenditure is the only way out to overcome the crisis.

Talking to PTI earlier, Isaac had said, "The Centre should provide a stimulus package to the state for capital expenditure, so that income picks up."

Balagopal said the states would be able to tide over the stress through collective efforts by the Centre and state governments and expressed hope that the union government would initiate steps for the same.

The RBI article prepared by a team of economists under the guidance of deputy governor Michael Debabrata Patra has said state finances are vulnerable to a variety of unexpected shocks that might alter their fiscal outcomes, causing slippages relative to their budgets and expectations.

"The recent economic crisis in neighbouring Sri Lanka is a reminder of the critical importance of public debt sustainability. The fiscal conditions among states in India are showing warning signs of building stress," it has pointed out.

For some states, it added, shocks may increase their debt by a significant amount, posing fiscal sustainability challenges.

For the five most indebted states of Bihar, Kerala, Punjab, Rajasthan and West Bengal, the debt stock is no longer sustainable, as the debt growth has outpaced their Gross State Domestic Product (GSDP) growth in the last five years, it has warned.