How can Keralam overcome the deficit of legacy infrastructure

Keralam has been widely celebrated for its social sector investments and achievements. In contrast, the state’s infrastructure lags woefully behind. This backwardness is a major hindrance to industrial investment in the state. Public investment in infrastructure has been insufficient. Even during this year, after a substantial increase in capital expenditure in the UDF government’s revised budget, the state’s capital expenditure to GDP ratio is only 1.34%, while the national average would be nearly 3%.

This wide gap in capital expenditure between Keralam and other states has persisted for the last five decades. Overcoming the consequent infrastructure deficit is a key challenge for Kerala’s development. The accumulated gap cannot be bridged within a reasonable time frame using budgetary resources alone. However much the present UDF government tries in this direction, they will fail if they remain true to their ‘Indira guarantees’.

Imbalance of the federal system

My main quibble with the expert committee that looked into the Kerala Infrastructure Investment Fund Board (KIIFB) is that it seems to be completely ignoring the above fundamental issue. For me, finance is a tool to achieve the goal of social development, which pushes the limitations of the federal system to its possible limits. The Committee shows no concern about the serious imbalances in the Indian federal system and the urgent need for a state like Keralam, which follows a different development paradigm, to maneuver within the federal system to continue its project.

Let me quote from the last Budget (2011-12) at the end of my first term as Finance Minister: “Let me present to you an alternative approach to overcome the obstinacy of the central government in following the principles of conservative fiscal policy. Instead of the government borrowing directly, the autonomous boards or companies controlled by the government should raise the loans and restore the road fund and the road company. . . .

Second, the Road Fund Board and the Roads and Bridges Corporation must achieve the credit rating required to create enough confidence in the market to lend ₹40,000 crore to these organizations over 10 years. To this end, three to six months of motor vehicle tax revenue each year shall be deposited in an escrow account through the Act…”.

Chandy’s surprise

The proposal received only sarcastic comments from the opposition. And in the next five years under the UDF government, nothing happened. But in Budget 2016, Oommen Chandy sprung a surprise: “The Kerala Infrastructure Investment Fund will be reorganized to mobilize ₹30,000 crore for the development of Kerala’s basic infrastructure.”

Hoping for a bipartisan consensus, in the revised budget for 2016-17 that I presented a few months later, KIIFB was singled out as a dedicated resource mobilization vehicle. A detailed reorganization scheme for KIIFB and a long list of major infrastructure projects that it would fund in the first phase were announced. Half of the tax on motor vehicles and petrol was guaranteed by KIIFB. In return, it securitized its future revenue stream and financed the projects announced at the assembly. The legislation passed unanimously by the Assembly ensured the exclusive use of funds for infrastructure, oversight mechanisms and accountability.

KIIFB’s achievements in the last decade have been remarkable. It has approved projects worth more than ₹ 1 lakh crore and availed investments worth more than another ₹ 100 lakh crore, especially on national highways. If the plan goes ahead, Keralam would become the leading trailing state in infrastructure in the next decade.

The intervention of the center

It was at this point that the Union Government stepped in, alleging violation of Article 693 and violation of the FRBM Act, and deducted from Kerala’s borrowing space the loans taken by KIIFB with retrospective effect. It seriously affected the state budget balance. Keralam countered by filing a case in the Supreme Court and initiating steps to convert KIIFB into a revenue-generating financial institution.

Already 20% to 25% of KIIFB projects generate revenue. Other projects can also be redone. Grants to KIIFBs would become viability gap funding from the state government or rent paid by the state government for facilities created by KIIFBs. Service charges for revenue generating projects can be kept very low with a long payback period.

But all such opposition to the unilateral actions of the Union government or modification of the KIIFB model was ruled out as the expert panel admitted all the allegations leveled by the Union government against the KIIFB and the cabinet which accepted the report. KIIFB’s fate has been sealed and its future activities will be limited to completion of ongoing projects, with the government providing finance as loan repayments or as payment of supplier invoices.

The tragedy is that neither the committee nor the government has provided any alternative to sustain the pace of infrastructure investment in the state. Despite all the nitpicking of procedures and rules, KIIFB is a remarkable developmental institution bringing much-needed efficiency and modernization to governance. Scrapping it will be a major political mistake that will set the state back at least ten years.

Published – 19 October 2026 06:30 IST