On the question of the future of KIIFB

In July, Kerala’s newly elected UDF government set up an expert panel to review the functioning of the Kerala Infrastructure Investment Fund Board (KIIFB). The panel, headed by a former civil servant, was tasked, among other things, with recommending measures to restructure KIIFB and strengthen the government’s institutional capacity. The committee recently submitted its report which was tabled in the State Assembly.

The committee, apparently critical of the functioning of the KIIFB, recommended its abolition; absorb their functions and capabilities into the state government, reports say. The main reason for the panel’s recommendation is that by combining the borrowing function of KIIFB with the national budget, the Special Purpose Vehicle (SPV) has lost its primary purpose.

A controversial investment model

The KIIFB, restructured by the LDF government, reportedly boosted state investment in infrastructure by increasing extra-budgetary resources, including securing soft loans known as “Masala Bonds” from international agencies following the catastrophic floods of 2019. However, the SPV’s functioning and financial performance remained questionable. The Comptroller and Auditor General’s (CAG) crackdown on KIIFB has become a convenient stick for the Center and opposition parties in the state. Leftist critics labeled it an arm of the “Leftist Managerial State” for promoting controversial projects and circumventing legislative approvals. In the fog of debate, the original purpose of KIIFB and the economic principles on which it is based seem to have been lost sight of. We try to explain them with the intention of shedding some light on the controversial issue.

Although Keralam has a healthy traditional transport infrastructure such as road network and rail connectivity, it lags behind in modern facilities such as high-speed railways or highways, especially when compared to neighboring states. Keralam reportedly spends just 1.5 percent of its gross state product (GSDP) on infrastructure. This was despite Kerala’s own tax revenue to GSDP ratio being among the highest among major states, according to RBI data.

KIIFB was established in 1999 and underwent a major restructuring in 2016; the results of this institution in extending the public goods are apparently well known. However, its operation has raised many questions. The CAG found that the SPV’s finances were beyond its procedural audits, which became a standoff between the Center and the state. Moreover, since KIIFB operated off the state budget without generating financial profits from its loans, the core of the dispute became the repayment of its loans from state revenues.

Justification of off-budget loans

In the good/bad old days of ‘planning’, public finances were broadly guided by a ‘gap-filling’ approach; meaning that the Center has made up the gap between the state’s projected revenue growth and its “development needs” as per the state’s plans. It was a negotiation process, partly financial and partly political. Evidence shows that wealthier and politically influential states received the lion’s share of the plan’s divisible pool of resources.

The Fiscal Responsibility and Budgetary Management (FRBM) Act of 2003 changed this by ostensibly introducing a “hard budget constraint”, with the fiscal deficit limited to 3 percent of GDP. RBI now monitors the level of national debt. The coupon (interest) rate of state loans depends on measures of state debt sustainability. The tough budget cuts are said to have improved state finances, or at least made them more transparent.

However, most states have devised various means of securing extra-budgetary resources or extra-budgetary borrowings (OBBs) – as evident from RBI’s State Finance Compilation. CAG, following the OBB, discovers that there are a number of them. And the actual OBBs are much higher than what he is able to calculate, according to his own findings. In other words, ensuring fiscal discipline looks like a cat and mouse game between the Center and the states. Incidentally, Keralam is not among the worst offenders.

Globally, there are a number of financial institutions and fiscal measures outside the budget process. Many kinds of parastatals are a feature—not a bug—of the fiscal landscape, especially among fast-growing Asian economies. China, for example, has a bewildering variety of financial arrangements that allow provinces to draw on resources from national development banks to maintain local employment, increase production and exports, and ensure political stability. No wonder China’s public debt-to-GDP ratio is nearly 300 percent — even though most of it is domestic.

So what should realistically be the rules for managing extra-budgetary resources and institutions for Keralam? Simply put, if extra-budgetary resources are used productively and are in line with government expenditure principles, such extra-budgetary institutions/borrowings may not be undesirable. This follows Domar’s rule: if the growth rate of output exceeds the interest rate on such loans (either at current or constant prices), they are being used productively. Since these investments are of a public good nature, individual projects may not generate sufficient income or cover full costs. However, if in the aggregate they contribute to the growth of state output (GSDP) and follow Domar’s rule, then such investments are in principle viable.

However, if state-level SPVs borrow from external sources for social purposes or green finance, which usually have lower interest rates for longer maturities, they need to be considered differently because they carry exchange rate risk. Given the fragile ecology of Kerala and the need for substantial cheap resources to protect it, external borrowing for such purposes may be desirable by forming an SPV, as KIIFB is said to have shown after the 2019 floods. The expert panel’s recommendation to dissolve KIIFB is the easy part. In the current political environment, efforts to increase public investment to catch up with neighboring states are a tougher task – Keralam is closely watched by the Centre. The state will have to devise newer and administratively innovative means of using OBB, as most states do. The task is primarily political.

(R. Nagaraj is an economist.)

Published – 28 Oct 2026 07:00 IST