Kerala's Fiscal Health: a state at a crossroads

The May 2026 election delivered a strong mandate from a younger, highly educated generation demanding opportunity rather than welfare alone. The report argues honest financial transparency is the precondition for keeping promises. Five converging pressures define the moment.

Key points

• Female unemployment among higher-secondary-educated women is 20.7% — nearly five times the national 4.5% (PLFS 2023-24).
• Over 2.2 million Keralites work abroad; remittances equal about 23.2% of Net State Domestic Product, sustaining consumption rather than production.
• Kerala's liabilities are 35.5% of GSDP (national 29.2%); committed expenditure 77.6% of revenue (national 46.1%); capital expenditure 1.34% of GSDP (national 3.2%).
• In 2024-25 committed expenditure hit ₹96,927 crore — salaries ₹39,904 cr, pensions ₹27,885 cr, interest ₹29,138 cr.
• The C&AG found overall liabilities grew 11.61% a year (2019-20 to 2023-24), yet only 5.18% of borrowings went toward creating capital assets.
• Kerala is India's 11th-largest economy, ~65% services; the 2025 Invest Kerala Global Summit drew ₹1.53 lakh crore of expressions of interest — but actual investment remains a small fraction.

The budget may look compliant on paper, but the treasury — the government's actual bank account — tells a far more stressed story. The daily cash crunch is the operational face of a deep structural imbalance: committed costs absorb ~77% of revenue while the revenue base steadily weakens.

Key points

• The treasury ran a negative balance in 10 of 12 months in 2024-25 (and 7 of 12 in 2025-26), versus just one negative month in 2022-23.
• The healthy-looking ₹6,322 cr year-end balance (2025-26) was an illusion — propped by ₹8,450 cr borrowed in March plus ₹4,969 cr of late central transfers; within six weeks it fell to ₹2,212 cr.
• Open Market Borrowings nearly doubled from ₹27,000 cr (2021-22) to ₹53,666 cr (2024-25) as ₹77,201 cr of Revenue Deficit Grants & GST Compensation disappeared.
• Borrowing is back-loaded into March to flatter the books: 32% of the year's OMB (₹13,608 cr) was raised in March 2023-24, versus a ~7% non-March monthly average.
• 2025-26 OMB of ₹49,788 cr at a 7.43% weighted rate adds ~₹3,699 cr in new interest every year.
• Reliance on RBI credit exploded: from zero WMA days in 2011-13 to a record 262 days of WMA + 84 days of overdraft in 2025 (overdraft carries penal rates of 7.25%–10.25%).
• The district-treasury bill-clearance limit was slashed from ₹5 crore to ₹5 lakh — a 99% cut — revised eight times in five years; "recurring fiscal triage."
• Inherited arrears of ₹48,733 cr (DA ₹21,670 cr, DR ₹14,387 cr, banks/contractors ₹3,431 cr, health claims ₹2,017 cr), of which ₹21,690 cr is an immediate 2026-27 obligation.
• Own tax revenue fell to 6.41% of GSDP, below the major-states average for the first time; tax buoyancy is a sub-unitary 0.96.

For a decade Kerala's budgets have consistently overstated revenues and understated deficits. Actual deficits repeatedly blew past both budget estimates and the targets in the state's own fiscal-responsibility law, and almost all borrowing now goes to service existing debt rather than build assets.

Key points

• Kerala has run a revenue deficit every year for a decade; by 2025-26 (RE) it reached 2.58% of GSDP and the fiscal deficit 3.78% — both above FRBM targets.
• In 2022-23 the primary deficit was effectively zero — meaning all borrowing went purely to service existing debt.
• State's Own Tax Revenue was over-estimated every year from 2016-17; realisation fell as low as 71% (2020-21), recovering to 92% (₹83,731 cr of ₹91,515 cr) in 2025-26.
• Capital spending fell below 50% of budget in several pre-COVID years (37% in 2018-19) before Centre's 50-year interest-free loans firmed it up.
• Apparent post-2020 "plan expenditure" overshoots (up to 119%) are a "financial sleight of hand" — KIIFB and PSE spending booked under an "Others" head.
• The 2026-27 interim budget assumed ₹59,774 cr of central transfers but the Union Budget yields only ₹39,274 cr — a ₹20,500 crore shortfall (tax share 2.38% vs 2.8% assumed; zero Revenue Deficit Grants).

KIIFB was relaunched in 2016 to raise market money for infrastructure outside the budget, sidestepping fiscal-responsibility limits. But a C&AG audit ruled that, because its debt is serviced from the state budget rather than its own revenues, KIIFB's borrowings are effectively state debt and must count against Kerala's ceiling — destroying the fund's original rationale.

Key points

• Created in 1999 but dormant for years; the 2016 Amendment Act reimagined it to borrow via SEBI/RBI-approved instruments, governed by a Chief-Minister-chaired Board.
• As of 31 March 2026, total inflows of ₹74,171 crore — ₹26,497 cr government contributions, ₹42,053 cr borrowings — with ~₹10,722 cr balance remaining.
• Its single largest funding stream is 50% of Motor Vehicle Tax (₹17,593 cr) — a recurring drain on state revenue; unmet loan liability of ~₹21,000 crore now falls on the state.
• C&AG finding: with no independent revenue base, KIIFB's debt is effectively state debt — so every rupee it borrows reduces the state's own borrowing ceiling, defeating the off-budget purpose.
• KIIFB borrowed at least 1.5 percentage points dearer than the government in nearly every year (rates of 8.27%–9.56%); a 1-point gap on ₹42,000 cr means ~₹420 cr extra interest annually.
• Project spending is skewed: Kannur alone took over 20% (₹24,407 cr) of approvals; with Thiruvananthapuram and Ernakulam, three districts absorb nearly half — with no needs-based justification.
• 68% of approvals went to just three departments — Public Works (34%), Industry (25%), Health (9%).

Kerala owns or part-owns 132 active PSEs, but most lose money year after year. The state pours in ever more — investment rose from ₹28,513 cr (2020-21) to ₹44,846 cr (2024-25) — while getting almost nothing back in dividends. Three utilities account for the bulk of the losses, and two now have negative net worth.

Key points

• 132 active PSEs across seven sectors; 65 are wholly government-owned. By form: 126 government companies, 6 statutory bodies.
• Government investment climbed from ₹28,513 cr (2020-21) to ₹44,846 cr (2024-25) — up ~₹16,332 cr in five years.
• Highly concentrated: five enterprises hold 86% of all PSE investment; Kerala Water Authority alone is ₹35,508 cr (40.9%).
• Accumulated losses of all PSEs grew from ₹31,517 cr (2021) to ₹72,851 cr (2024-25), peaking near ₹78,069 cr in 2023-24.
• In 2024-25, KSRTC, KSSPL and KWA caused 72% of total PSE net loss (in 2021-22, KSRTC + KWA alone caused 79%).
• Net worth wiped out: KSEBL at −₹35,149 cr and KSRTC at −₹19,821 cr in 2024-25.
• PSEs return almost nothing: just ₹248.79 cr in dividends in 2024-25 against ₹1,504 cr of subsidies and ₹2,402 cr of budgetary support.
• They also default on state loans: arrears led by KSRTC ₹11,679 cr (since 1983-84), KWA ₹3,930 cr and KSEBL ₹1,837 cr — 69% of total arrears.
• KSEBL: only ~25% of power is generated internally, so purchase exceeds half of total cost; cumulative revenue gap reached ₹6,645 cr by 2023-24.

Key recommendations

• Restructure PSEs — especially the three big utilities — to operate on sound commercial principles instead of draining the exchequer.
• Shift from production-based to consumption-based subsidies — pay deserving consumers directly via DBT rather than absorbing enterprise losses.
• Significantly expand electricity generation (solar, hydel, nuclear) for affordable, reliable power for future industry.
• Merge the profitable Beverages Corporation with the loss-making Civil Supplies Corporation to offset losses against profits.
• Consider disinvestment, privatisation or closure of non-strategic, non-viable enterprises — while safeguarding workers.

Because salaries, pensions and interest are protected, the burden of fiscal adjustment falls on more flexible "plan" (development) spending. Money has shifted from social services toward general and economic services, and spending on Scheduled Castes and Tribes has fallen well below mandated levels.

Key points

• Plan expenditure as a share of total state spending fell from a peak of 23.25% (2020-21) to 17.55% (2025-26 RE).
• Priorities shifted away from people: social services' share collapsed from 53.78% (2017-18) to 30.68%, while economic services rose to 47.52% and general services to 16.13%.
• Social & Community Services (education, health, welfare) fell from ~34.76% to just 19.55% of development spending.
• The mandated SC + ST sub-plan minimum is 12.64% of plan outlay — yet welfare for SC/ST/OBC & minorities fell from 9.24% (2017-18) to 3.85% (2025-26 RE).
• Actual SC sub-plan spending fell to about 50% of outlay in the stress year 2019-20; the ST sub-plan never topped 85%.
• KIIFB did not fill the gap — releasing only ₹64 cr (0.07%) for SC Development and ₹18 cr (0.02%) for ST Development.

Framed around the 2026 election as a "wake-up call," this chapter argues the crisis is also an opportunity — calling for private and cooperative investment to drive growth alongside deep structural reform.

• KIIFB: Bring it under departmental and Finance-Department budgetary control; order an immediate C&AG performance audit; stop earmarking Motor Vehicle Tax and Petroleum Cess to it (a breach of the Consolidated Fund principle, Article 266).
• Public enterprises: Commission efficiency studies for KSEBL, KWA and KSRTC; appoint professional chairpersons for 3–5 year terms; shift to consumption-based subsidies; wind up chronic loss-makers; monetise unused assets; allow private participation. (Kochi Metro loses ₹35 cr a month.)
• Salaries & pensions: With ~80% of resources going to salary, pension and interest, raise the retirement age toward the GoI level — each one-year rise saves ~₹6,000 cr — and hold pay commissions once a decade.
• Employment & growth: Reform agriculture/land/labour laws, expand tourism, IT/AI and coastal sectors, and open higher education to private and foreign universities.
• Revenue: Commission a study to expand GST collection and develop local-body market borrowing via bonds.
• Planning & administration: Restructure the State Planning Board into a think-tank and project monitor; introduce budget-linked performance management; pursue genuine digitalisation; redeploy surplus teachers.
• Welfare delivery: Replace KSSPL pension distribution with Aadhaar-linked direct benefit transfer.
• Centre–State relations: Build a coalition of similarly placed states to push back on the shrinking divisible pool, hard-to-access centrally sponsored schemes, and the 3% off-budget borrowing limit.
• Energy strategy: Pursue private and central investment in power — 6,000 MW solar, 8,000 MW pumped hydro, plus small modular reactors — and deploy cooperative-sector resources (~₹1.3 lakh crore credit base).