The Comptroller and Auditor General’s (CAG) report on State Finances for 2024-25, tabled in the State Assembly on Tuesday (June 23), has drawn attention to how little of the State’s borrowings actually go towards capital expenditure, or asset creation that benefits a State in the long-term.

Of the total borrowings of ₹3.22 lakh crore in 2024-25, 86% (₹2.77 lakh crore) went towards repayment of earlier borrowings and ₹27,997.23 crore (9%) towards revenue expenditure. The net capital expenditure from the borrowings totalled ₹17,188.42 crore.

In the previous fiscal, 89% of the total borrowings were spent on repayment of earlier borrowings, 5% on revenue expenditure and 6% on capital expenditure.

In fact, this trend has been visible throughout the decadal period from 2015-16 to 2024-25. The net capital expenditure from borrowings has fluctuated between 5% at the lower end and 12% at the higher over this period.

Ideally, borrowed funds should be used for capital creation and infrastructure development. Using them to meet current consumption and repayment of interest on outstanding loans is not a healthy trend, the CAG said. In using the lion’s share of its borrowings on routine needs, the State limits its ability to channel funds for capital expenditure.

White Paper

The recent White Paper on the State’s fiscal health too had drawn attention to this problem in Kerala’s finances: “When borrowings are used predominantly to finance committed expenditure, revenue deficits, and the servicing of accumulated debt rather than productive asset creation or knowledge generation, the growth-generating capacity of debt weakens considerably. The result is a structurally fragile fiscal dynamic in which rising liabilities lead to rising interest obligations, with little or no corresponding expansion in productive capacity or the State’s long-term revenue base,” the White Paper, tabled in the Assembly in early June, had noted.

On the increasing committed expenditure (salaries, pensions, interest payments), the CAG report urged the government to undertake a detailed review and introduce reforms in areas including expenditure management and, debt servicing. In 2024-25, the State’s committed expenditure of ₹98,563.59 crore comprising salaries (₹41,550.15 crore), pensions (₹27,875.21 crore) and interest payments (₹29,138.23 crore) accounted for approximately 79% of the State’s revenue receipts.

Kerala’s overall liabilities grew from ₹3.02 lakh crore in 2020-21 to ₹4.46 lakh crore 2024-25. the overall debt-to-gross State domestic product (GSDP) ratio dipped from 39.21% to 35.74% during this period.