Closing KIIFB Answers the Accounting Question, Not the Investment One

The Accounts Can Be Fixed; the Investment Gap Remains

Kerala's problem was never too much infrastructure spending. It was too little. According to economist R. Nagaraj, Kerala spends about 1.5 per cent of its GSDP on infrastructure, even though RBI data rank its own-tax revenue to GSDP ratio among the highest of major states.

The state has a sound traditional road and rail network but lags its neighbours in high-speed rail and modern highways. KIIFB, restructured in 2016, was built to close that gap with money raised outside the budget.

Why the Panel Says KIIFB Has Lost Its Purpose

An expert panel chaired by retired IAS officer Sudha Pillai, constituted by the UDF government in July 2026, has recommended ending KIIFB's role as a borrower and project financier and moving ongoing projects to government departments.

Its main reason concerns accounting. In March 2022, the Union Finance Ministry ruled that borrowings by state bodies, where repayment comes from the state budget, count as the state's own borrowing. KIIFB's loans, repaid from motor vehicle tax and petroleum cess, were then deducted from Kerala's net borrowing ceiling.

Once that happened, KIIFB no longer added any borrowing capacity; it simply borrowed at a higher cost than the state could. The panel found that 99.4 per cent of the funds the government transferred to KIIFB between 2021-22 and 2024-25 went to repaying loans and estimated that the arrangement left the state with an additional burden of about ₹13,103 crore.

The Transmission Mechanism Here is

how this reaches people. Before 2022, KIIFB borrowing paid for schools, hospitals and roads without reducing the state's budget borrowing. After 2022, every rupee KIIFB borrowed reduced what the state could borrow for its own budget.

Because KIIFB had borrowed at higher rates, including Masala Bonds raised in London in 2019 at a coupon of 9.723 per cent, the same infrastructure ended up costing more than direct government borrowing would have. The people who lose are the residents of districts still waiting for half-built projects and taxpayers whose revenues now go mainly to debt repayment.

The Test That Matters

Nagaraj's argument is that the right test for off-budget borrowing is not where it sits in the accounts but what it achieves. By the Domar condition, borrowing is sustainable when the growth it supports exceeds the interest rate on the debt.

Some public projects will never repay themselves directly, but they are justified if together they raise GSDP growth above the cost of borrowing. Borrowing at nearly 10 per cent sets a high bar, but it is the right measure.

Kerala's case is also a federal one. Under Article 293(3), a state that owes money to the Centre needs the Centre's consent to borrow. The CAG found KIIFB's borrowing bypassed that and Kerala has challenged the Centre's limits in the Supreme Court.

Kerala is not the only state with off-budget borrowing; RBI and CAG estimates put states' total above ₹3 lakh crore and Nagaraj notes Kerala is not among the worst offenders. Closing KIIFB will make the accounts more transparent.

But Kerala still needs a way to fund the infrastructure it lacks and the panel itself has suggested alternatives such as an Infrastructure Investment Trust and an Infrastructure Development Fund. For the exam, the insight is that off-budget borrowing should be judged by whether the growth it creates exceeds its cost, not only by whether it appears in the budget.