By P. SESH KUMAR
Analysis finds genuine concerns over debt and deficits but says the report’s political tone often overshadows Kerala’s fiscal improvements and long-term strengths.
New Delhi, June 7, 2026 — Kerala’s newly published fiscal status report paints a grim picture of debt, deficits and welfare burdens. While many figures are alarming — debt nearing ₹5 lakh crore, interest eating up 20% of revenues — the report’s doomsday narrative often underplays context and overreaches in blame.
Kerala’s self-assessment report frankly warns of a “large burden of outstanding liabilities (₹5.07 lakh crore)” and heavy fixed costs – salaries, pensions and interest- consuming most revenue. It laments that only 1.3% of GSDP goes to capital expenditure, among the lowest nationwide. Indeed, the state has struggled with a high debt-to-GSDP ratio (typically 28–38%) and steep interest payments -about 20% of revenue according to NITI Aayog’s analysis. These are real strains. Yet, as independent analysts note, Kerala’s debt ratio is hardly an outlier when its unique social spending is accounted for, and much of the 2020 spike was due to denominator effects from the pandemic.
The report’s data on fiscal stress (negative treasury balances, days on Ways & Means advances) are alarming, but not unprecedented. Many states use RBI overdrafts; what matters is chronicity.
The report’s critique of Kerala’s cash management is backed by treasury figures: annual closing balances fell steadily pre-COVID, from ₹1,950 crore in 2016–17 to negative by 2019–20, and 2024–25 saw negative monthly balances in 10 of 12 months. It notes that Kerala met targets by front-loading open-market borrowing in March (32% of 2023–24 borrowings came in March alone).
While such “last-minute borrowing” looks bad, it’s not unique to Kerala-many states do this to hit fiscal rules. The report blames “flawed budget assumptions” and reduced central transfers (GST compensation, revenue-deficit grants) for the squeeze. Partly true: Kerala did see GST compensation end in 2022 and 15th Finance Commission grants lapse, creating a ₹20,000–₹30,000 crore hole. But the report tends to overstate that handover from the previous government left Kerala helpless.
In fact, Kerala’s finance minister boasts that revenue and fiscal deficits have improved in recent years. Official targets reflect this: Kerala budget docs aim to cut the fiscal deficit to 3.2% of GSDP in 2025–26 (from 3.5% in 2024–25) and revenue deficit to 1.9% (from 2.3%). These trends (few pay attention to them) show Kerala moving in the right direction, even if slowly.
The chapter on Kerala’s finance mechanisms correctly highlights that the state leaned on RBI support increasingly: the report documents many days of Ways & Means and overdrafts, rising dramatically during COVID-19. It’s indisputable that such borrowing is costly (repo plus penalties) and signals stress.
But one must ask: Why? The report says “committed expenditures” (salaries, pensions, interest) routinely exceed new borrowings. That’s self-evident, and true; Kerala has one of the highest salary plus pension burdens among states.
The report also faults poor GST performance; indeed, Kerala’s own-tax growth has lagged peers. Still, it might have emphasized that Kerala’s overall tax buoyancy is also hit by slowing growth, which itself has structural causes.
For example, Kerala’s GSDP growth (around 6.5% in 2023–24) trails national average. The report blames low private investment but doesn’t fully examine why industry shuns Kerala (land, labour and environmental rules, see below)- a notable omission.
When discussing KIIFB (the infrastructure finance body) and para-statals, the report is most forceful. It criticizes KIIFB’s governance (a 2017 order gave its CEO quasi-ministerial powers, later rescinded) and exposes that KIIFB debt is effectively state-guaranteed at a higher cost. It’s valid to point out that KIIFB loans (₹21,000 crore) and projects (₹35,000 cr) ultimately rest with Kerala.
The C&AG audit flagged these issues, and indeed the report shows KIIFB concentrates funds in a few districts for seemingly political reasons. These critiques have merit, though the report sometimes reads like an anti-KIIFB polemic-it acknowledges KIIFB’s positive practices (digital systems, quality projects) but quickly counters that “the fundamental premise is undermined”. The report’s tone on KIIFB is harsher than in neutral accounts, suggesting a political punch.
On public sector enterprises (PSEs), the report is right that Kerala’s PSEs are numerous and loss-making: just five large PSUs hold 86% of investments and losses ballooned from ₹31,571 cr (2021–22) to ₹78,851 cr (2024–25), with KSRTC, KSEB (power) and KWA (water) running 72% of losses in 2024–25. These data are stark: NITI Aayog likewise noted Kerala’s interest burden and mounting deficits crowd out development.
The status report recommends merging the liquor corporation and civil supplies for tax-efficiency, shifting from production- to consumption-subsidies, and considering privatization of non-essential PSEs. These are sensible ideas – ensuring subsidies reach needy citizens rather than fattening bureaucracies. Yet the report sometimes implies mismanagement at PSEs is self-evident, whereas some losses (e.g. in beverages or housing) also subsidize social goals.
It does caution that “social responsibilities should not be used to mask inefficiencies”, which is fair, but the nuance is thin. There’s little examination of whether underpricing (cheap power) or ambitious welfare schemes (free commodities) are major cost drivers – another missing discussion.
A major omission is comparative perspective. The report treats Kerala as unique, but many structural issues aren’t: other high‑spend states have similar woes. For instance, Rajasthan and Odisha face big revenue gaps, and even fiscally cautious states like Gujarat spend more than 20% of revenues on interest. Kerala’s interest-to-revenue ratio (around 20%) is indeed among the highest, but the NITI report shows Gujarat is worse.
The report also underplays Kerala’s achievements: literacy, health and gender indexes are world-class, requiring expenditure. The status paper repeats phrases about Kerala’s “exceptional social indicators”, yet it doesn’t use them to explain budget choices. Nor does it mention that Kerala historically kept deficits within FRBM targets except for a brief recent breach. By focusing only on financing, it omits that these deficits have translated into investments in human capital- arguably fuel for future growth.
Rhetorical framing and bias
The style is judgmental: words like “alarming,” “indulgence,” “sleight of hand,” scoop! For example, it calls the budget’s handling of off-balance-sheet spend “financial sleight of hand”. That’s a bold claim. It is true that excluding KIIFB & PSU spend from estimates understates deficits, but “sleight of hand” presumes intent. Similarly, the report warns that Kerala “has been violating the basic tenet of ‘borrow to invest, growth will repay’”.
This is technically true (much borrowing went to salaries and subsidies), but it also ignores that Kerala’s growth is inherently service-heavy and labour-focused, making a strict capital-debt rule less straightforward. The language is designed to provoke (note frequent exclamation-like phrasing in Malayalam original). At times the report reads less like dispassionate analysis and more like a campaign speech: the Chief Minister’s voice introduces it, but many statements echo opposition criticism.
Facts versus spin
The report claims a “dramatic decline” in plan spending, especially for SC/ST/OBC/minority welfare (from 9.24% of plan outlay in 2017–18 to 3.85% in 2025–26). If correct, this is worrying. But context is needed: Kerala’s entire plan outlay is smaller than neighboring states’, and actual allocations might have shifted forms (e.g. many welfare schemes may now be funded outside the traditional plan head). The report also asserts only a quarter of state tax receipts even reach Kerala (due to union cesses), but that’s a problem for all states and doesn’t justify fiscal apathy.
Importantly, the report blames the previous government as background, though the preface says the aim isn’t political vendetta. In practice, nearly every failing is attributed to “the expenditures committed by the previous administration” or its unrealistic budget math. This is one-sided. For balance, it should note that Kerala’s problems have persistence beyond any single regime (debt grew over decades, even under governments of all stripes). The report hides that both parties have historically been spendthrift or cautious; it does not contextualize whether the spending spree of 2017–22 under one government was far beyond another’s.
What it leaves out
Surprisingly, it barely discusses revenue growth potential. Kerala’s own-tax effort is low (GST plus few local taxes) but the report stops at “below average”. It doesn’t dig into how to increase it. Suggestions like better compliance, broadening VAT or land taxes or encouraging startups (e.g. green hydrogen projects are just now emerging) are absent. It almost treats revenue shortfalls as fate, not failure of policy. And it skips discussion of how to attract investment: the report notes low private capex but doesn’t analyze regulatory hurdles – for example, Kerala’s strict land and environmental rules or labour laws that companies cite as deterrents. This is a glaring omission when prescribing growth.
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Positives and path forward
Despite the gloom, the situation isn’t hopeless. The Sixteenth Finance Commission gave Kerala some gains (though few reports mention them). In fact, Kerala’s share of the central tax pool was raised to 2.382% (up 0.457 percentage points). That means billions more in transfers over 2026–31. True, FRBM grants were dropped, but Kerala should emphasize its bigger pie share.
The report barely notes that shift. Even more critical: local self-governments in Kerala will receive finance commission grants (about ₹3,300 crore for rural bodies and ₹16,700 crore for urban bodies over 2026–31). By decentralization, Kerala excels, so these funds could be a game-changer for infrastructure if used wisely. The report oddly never frames these as silver linings.
Budget and planning documents actually show Kerala making near-term improvements. The revenue and fiscal deficits have been trending down: Kerala’s Budget 2025–26 projects a fiscal deficit of 3.2% of GSDP (versus 3.5% last year), and a revenue deficit of 1.9% (down from 2.3%). These are prudent shifts and indicate financial consolidation, not chaos. The finance minister even declared Kerala had “overcome the trying times of severe fiscal constraints” and touted that revenue deficits fell from 2.25% in 2021–22 to 1.58% in 2023–24. That counter-narrative is missing in the status report. The message “all is lost” overlooks that the ship is steering towards calmer waters.
Going forward -short term
Instead of fixating on blame, Kerala’s new government should double down on actual fixes. First, meet pending obligations. The report notes nearly ₹48,733 crore in arrears (dearness allowance, pensions, contractors). Clearing DA/DR arrears would restore trust in government. It also frees up public morale and legal compliance, possibly unlocking staff productivity.
Short-term, Kerala should strictly curb new nondiscretionary spending: suspend non-critical schemes, enforce FRBM limits (the 3% deficit rule) and avoid late-year borrowing gimmicks. The budget hints at this: hikes in land and vehicle taxes, and collection of court fees are intended to raise around ₹366 crore extra. The state should press on these fronts- even unpopular hikes if needed- and improve tax administration (e.g. a crackdown on tax evasion, digitize assessments). Land revenue was deregulated here only recently; accelerating that overhaul could yield millions.
Medium term reforms
Kerala’s chronic imbalance stems from structural issues. The government must encourage growth instead of just cutting. Focus on “sunrise” sectors: with adequate power (private energy participation is urged by the report), Kerala can attract data centres, renewable energy projects, and medical or IT parks. The status report itself, in a rare aspirational moment, calls for legal reforms: easing land and labour laws, streamlining procedures, and promoting industrial infrastructure.
These points should be front and center. For example, Kerala could emulate Andhra’s red/tangerine cities model or Gujarat’s single-window industrial clearance. Tourism, spices and fisheries -Kerala’s unique strengths-deserve innovative marketing (e.g. spice park, deep-sea fishing hubs). The government should incentivize private invest through Public-Private Partnerships for ports or highways, leveraging modest equity but large know-how from outside.
On the expenditure side, consolidation is vital. The report’s suggestions on PSEs and subsidies make sense: end freebies that benefit well-off classes, and consider PSE monetization. Many states sell loss-making enterprises. Kerala could privatize non-essential units (like some manufacturing PSEs mentioned) or bring in private management (as suggested for KWA or even parts of KSEB). Subsidies should be reoriented: the idea of cutting production-based food subsidies in favor of direct cash transfers (targeted) is sound but politically tricky in Kerala’s consensus democracy. Yet a pilot program could be tried for food or farm inputs to save crores.
Finally, capitalize on decentralization. The report stresses that Kerala’s gram panchayats already do much; now they’ll get more money. Empowering them to raise own revenues (property taxes, tourism levies) can boost the economy. Investment in rural broadband and skilling can also create local enterprise. Aligning 16th Finance Commission grants with Kerala’s participatory budgeting (local plan schedules) would ensure funds serve grassroots needs rather than party fiefdoms.
In summary, the status paper rightly catalogs Kerala’s fiscal ailments but paints them with broad strokes and a defeatist palette. The reality is mixed: yes, Kerala is more indebted and salary-heavy than many peers, but it also enjoys high per-capita GDP, healthy human indices, and determined budget targets for consolidation. By fixating on inherited woes, the report glosses over these positives and the state’s own policy tools.
The better narrative is this: Kerala faces fiscal headwinds, yet it has agency. Short-term belt-tightening and revenue reforms can tame deficits; mid-term reforms and investments can reignite growth. As fiscal experts suggest, there’s only so much tightening can do- growth must bear the load. With disciplined spending and smarter taxation (plus the modest help from Finance Commission grants), Kerala can stabilize its finances without sacrificing its social achievements. In the end, the new government’s task is clear: stop the blame game, harness the facts, and chart a positive course- because Kerala’s citizens deserve both fiscal responsibility and the promise of better public services to match.
Key Takeaways
- Kerala’s outstanding liabilities have crossed ₹5 lakh crore, with interest payments consuming around 20% of revenue.
- The report criticizes heavy welfare spending, cash-flow stress and dependence on borrowings.
- Analysts argue the report underplays Kerala’s social achievements and recent fiscal improvements.
- KIIFB liabilities, PSU losses and pension burdens remain major concerns.
- Experts suggest growth-oriented reforms, better tax collection and targeted subsidy rationalization as the way forward.
(This is an opinion piece. Views expressed are the author’s own.)
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