KOCHI: While offering a stable outlook on finances of Kerala government , the international credit ratings agency Standard & Poor’s (S&P), noted that the state will have a strong economic growth over the next 12 months. However, it also highlighted several negative aspects. The ‘research update’ document from S&P on Kerala sheds light on the areas where the state is weak or performs less than adequate.On Tuesday, S&P had rated Kerala State as ‘BB’ grade, which belongs to the highest rating tier within the high yield bonds. However, it is a shade or two below the prime bonds and falls into the ‘speculative’ or ‘high risk’ category. Typically, the yields on these bonds are high as the investors should be compensated for the high risk.“Our ratings on Kerala reflect the Indian state's weak budgetary and debt metrics driven by its large spending on socio-economic welfare to support a low-income economy. We view the state's internal liquidity position as very weak but mitigated by proven access to deep domestic capital markets,” said the research update from S&P, while giving the state a ‘BB’ rating on a long-term basis.“The stable outlook reflects our view of the state's strong economic growth over the next 12 months and the likeliness of central government support in the case of financial distress,” the agency noted. S&P is of the view that the state’s institutional framework is ‘evolving but unbalanced’. While its budgetary flexibility is ‘weak’, its budgetary performance and the overall economy are ‘very weak’.Explaining the rationale behind the ‘BB’ rating, S&P said it was constrained by structural budgetary deficits resulting from large committed expenditures and considerable socio-economic welfare spending. “Given Kerala's commitment to maintain socio-economic spending and the need for large capital investments, we believe the state government will find it challenging to curtail its expenditure. As a result, we expect the state's debt burden to remain heavy. Moreover, the ratings are also constrained by India's unbalanced intergovernmental system, which places heavy spending mandates on state governments without sufficient allocations of revenues to fund them,” it said.Tax collection is another problem area. “Exacerbating the weak shape of Kerala's finances is the poor efficiency of tax collection. The state's capacity to self-finance is challenging and Kerala has opted to increase debt in the short term to deliver on basic services. This aggravates the state's interest burden and further increases operating expenditure,” the research update noted.A very low per capita income also poses problems. “Kerala's economy, although growing strongly, has a very low per capita income of about US$2,000 in 2018. The resultant narrow tax base adds to the budgetary weakness of the state,” the report said.Even though, the S&P report has more negative factors to point out, it also highlights few positive aspects too. “We assess Kerala's financial management as satisfactory. Policymakers are generally in accord on key development issues, and this is reflected in a consistent focus by successive governments on improving healthcare and educational standards. In our view, the state's policymakers are of high calibre and have extensive experience in central government and state government administration. Kerala has its own fiveyear plan which acts as an anchor for policy formulation. This informs our view of long-term capital and financial planning, which we view as more advanced than some domestic peers'. However, revenue and expenditure forecasts tends to be optimistic, reflecting some budgeting inaccuracy. Kerala's level of transparency and disclosure is high,” the report said.Despite recurring high deficits, Kerala's debt has stabilized (albeit at a high level) due to steady revenue growth, the report noted.

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