Kerala Assembly: CAG report says KIIFB's borrowings violates constitutional provisions

For the first time in the history of the Kerala Assembly, the CAG report was tabled with the Finance Minister’s objection note
Kerala Assembly: CAG report says KIIFB's borrowings violates constitutional provisions

Much to Finance Minister TM Thomas Isaac’s strong objections, the CAG report was tabled in the Kerala Assembly on Monday.

Reportedly, this the first time in Kerala Assembly’s history that the CAG report was put forward with the Finance Minister’s objection note. Members of the opposition have strongly opposed the FM’s objection note.

“Due to the procedural violations by the CAG, the finance department is being forced to table the CAG report with objections, Isaac told the Assembly moments before the report was tabled in the House.


The report criticized the Kerala Infrastructure Investment Fund Board’s (KIIFB) borrowings and called them unconstitutional. The CAG says that the KIIFB's borrowings have no legislative approval and violates several provisions of the Indian Constitution.

“It is observed that the maximum amount of borrowings is done from ‘masala’ bonds, which are, by their very nature, external commercial borrowings,” the reports says, adding that only the Centre has the constitutional power to raise foreign loans.

The report further adds that the entire repayment is being done via Kerala government’s own resources. The CAG concluded that such foreign borrowings, in all purpose, are borrowings of the state government and appears to violate provisions of the Indian Constitution. The Kerala government has encroached the powers of the central government, the CAG report says.

The CAG also rebuked the Reserve Bank of India (RBI) for granting permission to the Kerala government for floating ‘masala’ bonds. The CAG also says that if other States goes on to adopt the same foreign funding model, it will increase the external liabilities of India, significantly.

The report also states that the Kerala government informed that KIIFB’s borrowing would become a contingent liability or would become a liability on the government when KIIFB defaults in repayment.

However, the CAG disagreed, saying that such liability is fully on the State. If the State government borrows money in the name of any PSU or AB which does not have an income source of its own, then there is nothing contingent about it, the reports states. In the case of KIIFB, the Board depends on government funds, petrol cess and motor vehicle tax.

The CAG also says out that the government should add KIIFB’s borrowings to Kerala's fiscal deficit. The borrowings should be within the debt ceiling recommended for the State, which is 3% of Kerala’s GDP.


Reportedly, Isaac is unhappy with a small section named ‘Off-budget borrowings’ under the chapter ‘Finances of the State Government’ in the report.

The Finance Minister alleged that the CAG slipped in the section without allowing the state government and KIIFB to explain its position. He pointed out that according to the country’s audit regulations directs that before any comment or observation is added in a report, the state government should get a chance to explain their stand.

Isaac further alleged that in the draft report sent to the state government, the CAG’s observations on KIIFB wasn’t included nor did the CAG discuss with government officials on this matter.

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