LDF’s Economic Growth Strategy a Risky Adventure


Kerala has been an outlier in India’s economic landscape on many counts. It has been consistently on top in the quality of life charts for the States. Kerala’s achievements in social indicators are well documented. Now again, the State is breaking away from the rest of the country to chalk out a different growth strategy. The LDF is implementing a government-led growth strategy, which will be funded outside the budget through Kerala Infrastructure Investment Fund Board popularly known as KIIFB. Many fear that this ‘KIIFB-led growth strategy’ can backfire landing the State in serious fiscal crisis. I belong to this camp of skeptics.

Ideally, a state should finance capital expenditure from its revenue surplus. Though theoretically this is sound, it is not practicable in the present circumstances when all states are running big revenue deficits. Since salaries, pensions and interest payments eat away the lion’s share of governments’ revenue, borrowing is the only viable strategy for financing developmental capital expenditure. Borrowing can be justified if the money is spent on income generating capital expenditure.

But if money is borrowed for meeting expenditures like salaries to government staff, pensions and interest payment (revenue deficit); that is not a desirable trend. That’s why economists stress the need to have zero revenue deficits. Even though successive budgets have been harping on the need to bring the revenue deficit down, in practice, the reverse has been happening. Now, we have reached a situation wherein the government cannot borrow even for incurring capital expenditure since the state has reached the limits for borrowing. Hence, the KIIFB alternative. In the State’s budgets for 2016-17 and 2017-18, KIIFB is all over the place. Dr. Thomas Isaac, Finance Minister, has announced a plethora of programmes and projects, all to be funded through KIIFB. Government’s strategy is to raise money outside the budget, borrowing through KIIFB and spending the money on various projects. The government expects this capital expenditure programme to stimulate growth which, in turn, will generate adequate revenue buoyancy enabling future debt servicing.

But what are the dangers of this strategy? Keynesian economics advocates fiscal stimulus to revive the economy from recession. But what is the Kerala scenario? During the last 20 years, Kerala’s growth rate has been higher than the national average. Kerala’s per capita income is 60 per cent higher than the national average. If we factor in the remittances from abroad, Kerala’s per capita income would be almost double the national average. This is the reason why Kerala leads the states in per capita expenditure. In brief, during the last 20 years the State’s economy did very well but public finances deteriorated. This is a reflection of fiscal mismanagement by successive governments.

No one will object to infrastructure investment through borrowings. But, the problem with KIIFB-led growth strategy is that part of the borrowed money is proposed to be spent on projects that will not yield revenue, like housing for the poor. Around Rs. 3000 crore are to be spent on KSRTC revival, which has not produced results in any of the previous such revival programmes. KIIFB itself had a pathetic performance in 2016-17, with targets for revenue mobilisation and expenditure falling short by a huge margin. The revenue expectations from higher growth are too optimistic.

Unlike other states, Kerala is a ‘money-order economy’ driven by remittances. The State is vulnerable to decline in remittances. Crash in crude oil price and the increasing indigenisation of the workforce in West Asia has led to sharp decline in remittances to the State. A trend reversal is not in sight. This has the potential to bring down Kerala’s growth rate, in the short to medium term. Further deterioration of revenue deficit (projected at Rs. 16,043 crore for 2017-18 in the budget) and ballooning of the State’s debt burden are looming large.

A saving grace might come from the implementation of the GST. Under GST, compliance will improve substantially, adding to the government’s kitty.  Along with this, the government should be focusing on attracting investment into the State. Kerala lags far behind other states in attracting private investment. Kerala’s future economic growth should be private investment-led growth. Unfortunately, the budget is talking about more investment in PSUs. Kerala has 96 PSUs under different departments, which have accumulated losses of Rs. 13,969 crore till 2016.  Pouring more money into these black holes, as the budget attempts to do, doesn’t make any economic sense. In brief, the KIIFB-led growth strategy is a risky adventure.


Dr V K Vijayakumar, Chief Investment strategist, Geojit Financial Services