Reconstruction: Kerala Disaster Should Trigger New, More Flexible Financing Policies

The widespread damage done by the floods in Kerala is leading to the usual Centre-state tensions that are entirely avoidable. The issue is to provide relief to the people first, and then work out a sensible way to finance reconstruction and rebuilding. Cheap loans, loan moratoriums, tax concessions, grants-in-aid, additional borrowing limits, higher local taxation, and liberalised investment policies should anyway be a part of the package.

Instead, we are arguing about whether the UAE should be allowed to provide (donate?) Rs 700 crore, when no such formal offer or the amount has been indicated by that country, whether central aid is too little or too late, and whether sudden release of water from a dam controlled by Tamil Nadu (Mullaperiyar) caused the devastation, etc. Kerala – and any state that faces devastation on this scale – should be helped through a formal policy to meet such calamities, and not given ad hoc solutions that may or may not set bad precedents, which then become entitlements for other states. If a 2004 policy is preventing Kerala from accessing UAE funds today, clearly we need to re-examine that policy and make it more flexible.

We need to be clear about one thing: these disasters will continue to happen. We can blame poor ecological management, big dams, global warming, corruption in construction permits, and poor maintenance of sewage and storm water drains for such widespread flooding, but such calamities can occur even if we fix all those issues. We have to be prepared, both for the short-term mitigation plans, and for the subsequent rebuilding and rejuvenation.

While the Kerala and Kodagu (in Karnataka) cases are already upon us, there is no reason why a sensible policy cannot be drawn up brick by brick even while the 15th Finance Commission is asked to work out a broader set of norms for dealing with the aftermath of such natural disasters.

Rescue and relief operations are probably well-understood, but the angst is usually about rebuilding shattered lives and shattered local economies.

The Kerala Finance Minister, Thomas Isaac, has suggested that the state should be allowed to levy a cess on the State Goods & Services Tax (SGST), or impose a calamity tax to generate additional resources for reconstruction, whose costs could exceed Rs 20,000 crore.

However, we need to remember one thing: policies made at the peak of a crisis will not stand the test of time. Whatever changes we need to make in goods and services tac (GST), must be made after a pause, and after examining all the pros and cons. If Kerala is suddenly allowed to impose a cess on SGST, there is no way you can stop other states from claiming the same rights and the already complex GST structure will become a nightmare. This may be what Rahul Gandhi or the opposition may want in the short run, but no responsible government should allow this to happen.

The Economic Times today (24 August) suggested that even if the UAE aid offer is unacceptable for good reasons, Kerala public sector enterprises or private companies involved in reconstruction can be allowed to float rupee bonds in which foreigners, including foreign nations, can invest for the long term. This is really the way to go.

In fact, another idea worth exploring is to allow the state to float perpetual bonds with zero interest or with very long repayment periods, possibly with tax deduction benefits, which means these will effectively be partial donations with only capital being returned in lieu of tax breaks. This will allow well-wishers to put their money where their mouth is, and we can test whether the UAE is overflowing with the milk of human kindness by investing in such bonds.

In order to make such ideas universal rather than being invented just for Kerala, all states – with the permission of the Centre – should be able to raise, say, upto 10-20 per cent more than their current borrowing limits through perpetual rupee bonds, with low- or zero-interest costs, from NRIs or domestic players, in specified disaster situations. The policy should ensure that this kind of leeway is not given to a state just to finance farm loan waivers or provide freebies before an election. As long as the bonds are perpetual or ultra-long-term in nature (30 years or longer, and with very low rates), it will not impact the state’s fiscal viability through interest costs.

Other such instruments, including a Kerala Reconstruction Fund to invest in entities involved in such projects, or listed bearer bonds that get tax concessions and indemnity from being questioned as to the source of funds, will also help.

The following operating principles should be followed to allow any state to raise calamity funds.

One, the policy norms should apply to any state, and must not be selective or ad hoc. Smaller states with smaller fiscal capacities should get a larger share of central grants-in-aid as a proportion of the funds injected if they face big disasters.

Two, a Centre-state council, which should include representatives of the Reserve Bank, should examine each state’s request for busting their borrowing limits to ensure that cheap bonds are not raised to finance profligacy or freebie cultures.

Three, tax concessions, interest rate subventions, and temporary debt moratoriums and relief for small and medium businesses and individuals should be part of any such disaster package, and there should be norms and limits on such interventions.

Once the policy package and its contours are evolved, no state should require the Centre’s nod to do what it needs to for its own people. We need to eliminate the politics from disaster relief if we are to avoid poisoning the wells of the victims.