Public Debt and its Sustainability at State

Level: A Study of Kerala

V. NAGARAJAN NAIDU

Introduction
This paper aims to figure out whether the fiscal policy of the government of kerala is
sustainable.The paper analyses various fiscal indicators of the state of the kerala between
the years 2000-2014.The analysis is based on Domar’s condition and indicator analysis of
various sustainability indices,the author has defined the parameters of sustainability for each
index and and has made his conclusions from these indices..The paper is divided into four
sections describing the fiscal profile,the breakdown of the government debt,Assessing the
sustainability of debt and the conclusion.

Kerala’s Situation
The growth rate in receipts is not consecrate to the growth in expenditure.This has resulted
in a burgeoning fiscal deficit.Revenue expenditure and non plan expenditure occupies a lion
share of the Expenditure while the Capital receipts(mainly loans and other liabilities) are
increasing at a faster rate compared to the growth in revenue deficit. The capital receipt,
particularly borrowings and other liabilities, had a growth rate of 21 per cent during the last
five years as compared to 12 per cent for the long term.The rate of growth of all these
deficits (revenue, fiscal and primary) is very high during short and medium terms as
compared to long term; these deficits have doubled more during the medium term
The development of an economy is determined greatly by the percentage of plan
expenditure out of the total expenditure.But the share of capital and planned expenditure is
very low,actually in the short term the capital expenditure has declined.This is a serious
problem since lower capital expenditure will result in lower sources for revenue mobilisation
and thus worsens the fiscal profile due to increasing debt.
The fiscal deficit is financed largely by borrowing.total interest-bearing debt obligations of
the state government include public debt consisting of internal debt, loans and advances
from the central government, and public account liabilities which include mainly the small
savings accounts and provident funds(As per the AG’s report on financial accounts of the
state government for various years,)
There has been a change in the structure of the interest paying obligations of the
government of kerala-The internals debts has increased to 64%,while loans from GOI is
6%,,with public account liabilities accounting for the rest
There has been a change in the structure of internal debt
The internal debt of the govt has increased from 50% to 70%,while the share of loans from
the central government and the public accounts has decreased from 2000-2014
Methodology
The author measures sustainability of the government data by finding1) the stable and
sustainable level of debt to fiscal deficit and growth of GSDP and 2)the sustainability indices
like the debt–GSDP stabilization index, sufficiency of non-debt receipts, availability of net
borrowed fund, burden of interest payment, investment and returns, interest payment and
receipt of state government, quality of primary deficit, buoyancy of debt compared to state’s
own receipt and primary balance, and maturity profile of debt.3)Debt maturity

A.)Stable and sustainable level of debt to fiscal

deficit and growth of GSDP

The level of public expenditure during a financial year must be limited the growth rate of
income plus a targeted fiscal deficit. Thus the stable and sustainable debt to GSDP (FRBM
Act and 13th Financial Commission Report) is defined as
d = (f (1+n) / n) (1)
where, d = stable debt–GSDP ratio
f = targeted fiscal deficit
n = growth rate of GSDP (FRBM Act and 13th Financial Commission Report)
the targeted fiscal deficit to GSDP for the state was 3.5

THE ACTUAL LEVEL OF DEBT-GSDP RATIO HAS EXCEEDED ABOVE THE

SUSTAINABLE LEVELS ALLL THROUGHOUT THE DURATION OF THE RESEARCH
STUDY.

B) SUSTAINABILITY INDICES

1)DEBT-GSDP
IF THE QUANTUM SPREAD PLUS PRIMARY DEFICIT IS NEGATIVE, WHICH IS THE
CASE FOR KERALA, IT IMPLIES THE DEBT-GSDP RATIO IS RISING, WHILE THE
DOMAR’S GAP (RATE SPREAD) IS POSITIVE ITS DECLINING, WHICH IS ALSO
CONCERNING.

2)SUFFICIENCY OF NON DEBT RECEIPT

IF NON DEBT RECEIPTS CAN COVER NON INTEREST OBLIGATIONS THEN ITS
FINE,BUT IN KERALS CASE UE TO INCREASING REVENUE EXPENDITURE,THE
STATE WAS UNABLE TO MEET ITS INTEREST OLBLIGATIONS except IN THE YER
2011-12.

3)Net Availability of borrowed funds

The debt sustainability of the state also depends on (i) the ratio of debt redemption (principal
and interest payments) to total debt receipts and (ii) application of available borrowed funds.
The ratio of debt redemption to debt receipts indicates the extent to which the debt receipts
are used in debt redemption, indicating the net availability of borrowed funds
A Large part is being used for debt repayment adding more stress

4)Burden of interest payments

The burden of interests has shown a declining trend as measured by the decline of interest
payments to revenue receipts

5)Investments and Returns

The average return on these investments was 1.46 per cent in the last five years, while the
government paid an average interest rate of 7.24 per cent on its loans from the central
government. The difference between the interest paid by the government for obtaining
borrowed funds and return of investment indicates the inefficient utilization of the borrowed
funds. This may affect future redemption of principal as well as interest payment in the state.

6)Loans and Advances from the state govt

There is a large gap between received and lend similar to the investments and returns,
hence bad for the economy in the long run.

7)Quality of deficit
(a) the ratio of revenue expenditure to fiscal deficit and (b) the capital expenditure out of the
primary deficit.Majority is spent on revenue expenditure
The quality of primary deficit, i.e., the extent of the deficit on account of enhancement of
capital expenditure as a debt sustainability index, highlights that the state has enough non-
debt deficit to meet primary revenue expenditure. The low share of capital expenditure from
primary deficit threatens the productive capacity and future debt redemption ability of the
state.

8)Buoyancy of debt, SOR and Primary Balance,

The buoyancy of debt,SOR and primary balance is not good.The negative buoyancy of
primary balances in recent years give warning signals

C.Debt Maturity
The government will have to repay 46.4 per cent of its debt between one and seven years.
The Rbi has mandated state governments to create a sinking fund. But the contributions to
this fund is also not adequate which will affect the redemption of past debt and stability of
debt.

Limitations
The paper does not explain the reasons why the deficit indicators has reduced.

References
Comptroller and Auditor General of India. “Finance Accounts”, Govt of Kerala,
Thiruvananthapuram, 2009-10, 2010- 11, 2011-12, 2012-13 and 2013-14.
Comptroller and Auditor General of India. “State Finances”, Govt of Kerala,
Thiruvananthapuram, 2009-10, 2010- 11, 2011-12, 2012-13 and 2013-14.
 . Dholakia H. Ravindra, T.T. Ram Mohan and Navendu Karan. “Fiscal Sustainability of
Debt of States”, report submitted to the Twelfth Finance Commission, Indian Institute
of Management, Ahmedabad, 2004.
George K.K and K.K. Krishnakumar. “Fiscal Management in Kerala: Constraints and
Policy Options”, working paper 9, Centre for Socio–economic and Environment
Studies, Ernakulam, 2003.
Govt of Kerala. “Budget in Brief”, Department of Finance, Govt of Kerala,
Thiruvananthapuram, 2009-10, 2010-11, 2011- 12, 2012-13, 2013-14, 2014-15 and 2015-
16.
Govt of Kerala. “Third Committee First Report (2010–11)”, Kerala Public Expenditure
Review Committee, Thiruvananthapuram, 2012.
Govt of Kerala. “Medium Term Fiscal Policy and Strategy Statement with Medium
Term Fiscal Plan for Kerala 2012–13 to 2014–15”, Department of Finance, Govt of
Kerala, Thiruvananthapuram, 2012.
Govt of India. “Mid Term Review of States’ Fiscal Reforms Facility 2000–01 to 2004–
05: An Internal Assessment”, Ministry of Finance, New Delhi, 2004.
Govt of India. “Indian Public Finance Statistics, 2010–11”, Ministry of Finance, New
Delhi, 2012.
Rajaram Indira, Shashank Bhide and R.K. Pattnaik. “A Study on Debt Sustainability at
State Level in India”, Reserve Bank of India, Mumbai, 2005. Reserve Bank of India.
“State Finance: A Study of Budget of 2011– 12”, Mumbai, 2012.
Sen, Tapas K. “Recent Developments in Kerala Finances”, working paper 449, Centre
for Development Studies, Thiruvananthapuram, 2012.
Sen, Tapas K. and Santhosh K. Dash. “Fiscal Imbalances and Indebtedness Across
Indian States: Recent Trends”, Working Paper 2013–119, National Institute of Public
Finance and Policy, New Delhi, 2013.
State Planning Board. “Economic Review”, Government of Kerala,
Thiruvananthapuram, 2009-10, 2010-11, 2011-12, 2012- 13 and 2013-14