Kerala’s fiscal status report: Its politics and economics
On June 4, Kerala’s new UDF government tabled a 195-page report on the State’s finances in the Assembly. Though presented as a neutral and objective
On June 4, Kerala’s new UDF government tabled a 195-page report on the State’s finances in the Assembly. Though presented as a neutral and objective document, the report rests on a set of familiar claims: Kerala’s debt levels are too high; revenue spending is excessive, capital expenditure is inadequate; public sector enterprises are a burden; and welfare schemes are becoming unsustainable. The report places considerable emphasis on Kerala’s outstanding liabilities. But the rising debt was largely a product of the Covid-19 pandemic, when the State made full use of the higher borrowing limit allowed by the Union. This could finance an effective pandemic response that was a model for India. But it raised the debt-to-GSDP ratio to 38.51% in 2021-22. Since then, as our estimates from the CAG reports show, the debt-to-GSDP ratio stabilised and fell to 33.61% in 2025-26. The State’s debt cannot be categorised as “unsustainable” too, as the differential between the growth rate and the interest rate (the Domar Gap) continues to be positive. Thus, the report’s claim of an impending debt implosion in Kerala is difficult to sustain. Guarantees given by the State government are also well within the limits of the Guarantee Ceiling Act. Conspicuously, the report is silent on the rising imbalances in Union-State fiscal relations in India.
These shifts are central to understanding Kerala’s fiscal position. Yet the report looks at the State’s fiscal condition almost entirely as an outcome of State-level policy choices. This narrow perspective raises legitimate questions on the report’s proclaimed neutrality and objectivity. An account of the slowdown in Kerala’s own-tax revenue must also consider the limitations imposed by the GST regime. As a major consumer State, Kerala was expected to gain from the destination-based GST system. But these potential gains were limited by administrative and technological constraints in the settlement of IGST in inter-State transactions. Frequent changes in GST rates and the erosion of effective tax rates also adversely affected the State’s own-tax revenues. These institutional issues go unaddressed in the report. Also, if the report was truly objective, it would have begun its analysis from 2013-14 (and not 2015-16), which was when Kerala’s own-tax revenue began to precipitously fall. But then, that would have weakened the present narrative of the State government. The report’s criticism of high revenue expenditure in the State misses a basic fact. A welfare state needs welfare workers. Kerala’s development experience is founded on achievements in education, healthcare, social security, and local governance. These gains rest on a large public workforce of well-paid and job-secure teachers, nurses, doctors, and other frontline employees.
The BriefWire