The Centre’s allocation of Rs 4000 crore to Kerala offers significant relief to the state amidst its financial crisis, triggered by a reduction in borrowing limits. This injection of funds has also helped the state treasury recover from overdrafts, ensuring timely payment of government employees’ salaries and pensions. Out of the allocated amount, Rs 2735 crore constitutes the state’s tax share and IGST share, as per Finance Minister KN Balagopal’s assertions that Kerala’s crisis escalated when the Centre withheld funds owed to the state.
To address liquidity concerns, the Treasury Department has raised interest rates on short-term fixed deposits from March 1 to March 25. Notably, the interest rate for 91-day deposits has increased from 5.9 percent to 7.5 percent. However, the Centre, in its response to a Supreme Court challenge by the Kerala government regarding borrowing limits, highlighted concerns about the state’s fiscal management. Kerala, along with Punjab and West Bengal, is deemed to have the poorest fiscal management, with borrowing reaching 39 percent of GDP in 2021-22.
The Centre’s stance underscores the necessity for Kerala to prioritize sustainable fiscal practices, especially given the 14th Finance Commission’s recommendation that interest payments should not exceed 10 percent of total revenue. Despite this, Kerala’s current interest payments amount to nearly 20 percent of revenue, indicating a critical need for improved financial management strategies to ensure optimal utilization of borrowed funds for productive investments rather than recurring expenses.
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