Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint

Opinion | The challenge of rebuilding Kerala

Kerala has faced the sort of natural calamity that should allow for a one-time easing of fiscal constraints

As the flood waters recede gradually in Kerala and the Kodagu district of Karnataka, the focus will begin to shift from relief operations to rebuilding. The trail of destruction is a long one. The initial estimates provide us with some idea about the scale of the task ahead. For example, 10,000km of roads as well as 100,000 houses will need to be rebuilt in Kerala. It is quite likely that the numbers will rise as more detailed surveys are conducted. The damage to economic life in the hilly regions of the two southern states will also need to be assessed.

The ongoing relief work has received support from across the country, be it other state governments or individuals or private sector organizations. The reconstruction work will need something more than voluntary effort, though even that would be welcome in communities that have been uprooted by the rising waters. Kerala chief minister Pinarayi Vijayan has sought 2,600 crore from the Union government to help his government rebuild the state. 

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The state government has also asked New Delhi to increase the amount it can borrow from the bond market. There is a strong case for the Narendra Modi government to agree to this demand. Indian state governments have signed off on fiscal laws that restrict the amount they can borrow based on fiscal deficit targets. Such fiscal laws across the world have inbuilt flexibility that allow the borrowing limits to be crossed in the case of special circumstances such as a sharp recession or wars or natural calamities. That is true of Indian fiscal laws as well. Kerala, and to a lesser extent Karnataka, have faced the sort of natural calamity that should allow for a one-time easing of fiscal constraints. The Reserve Bank of India could also offer immediate liquidity support through a special ways and means advances (WMA) window.

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One possible way to reduce the cost of reconstruction would be the issue of special bonds at interest rates that are far lower than what the bond market would demand. Here is an idea. This newspaper suggests that it would be worth structuring a bond where the interest costs of the borrowing are shared by three entities—the Union government can waive taxes; individuals across the world, including the Kerala diaspora, can accept lower interest rates; and the state government will be left with an interest rate that is around a third of what would otherwise have to be paid to investors. Of course, such bonds should be used only in special circumstances. The use of the money will also need to be tracked.

Financial markets can have another potential role in the case of future episodes in the country, especially given the context of climate change. India needs to have a market for catastrophe bonds that insure people against extreme events that have large costs. These bonds will allow governments to buy protection from investors who are willing to bet against extreme climate events, though at a relatively high rate of interest. Governments buying such protection will then need to set up special purpose vehicles (SPVs). Much will depend on the pricing of these bonds, investor appetite for them, potential tax breaks, and the ability to assess the risks of extreme weather events. Catastrophe bonds are gaining in importance across the world, and Mexico has been an early mover. Its most recent catastrophe bond was issued in 2017 with the backing of the World Bank.

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Rebuilding Kerala is going to take time. The floods have perversely provided the state government the opportunity to think anew about its infrastructure. The case of Surat is interesting. The Gujarat city was hit by plague in 1994, following sudden floods that left rotting carcasses on the streets of a town that was reputed to be one of the dirtiest in the country. The plague rattled citizens enough for them to rally around a city administration that decided to start afresh. Last year’s rankings, released by the government under the Swachh Bharat Abhiyan, ranked Surat as the fourth cleanest city in India, after Indore, Bhopal and Visakhapatnam.Though it has slipped in this year’s rankings, the point is not whether there are parallels between what happened in Surat and what has happened in Kerala and parts of Karnataka, but that natural disasters can provide opportunities for fresh starts.

How can the government raise resources to rebuild Kerala? Tell us at views@livemint.com 

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