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. But the report does not see their salaries as investments in human capabilities and social infrastructure, but as mere consumption expenditures.
The report’s argument that capital expenditure in the State is low is also poorly founded. Amusingly, the report excludes from its ambit the capital expenditures incurred by local governments and special purpose vehicles. In fact, Kerala is one of the few States in India that increased the share of capital expenditure in the budget over the past decade, thanks to the continued presence of planning institutions. But reflecting a broader preference for a neoliberal model of governance, the report recommends a dilution of planning mechanisms, and their diminution to mere “think tanks”.
Such a preference is evident in the approach to public sector units (PSU) too. In its eagerness to deride the PSUs, it ignores the reality that the number of profit-making PSUs increased from 39 to 57 between 2015-16 and 2024-25. Their overall turnover too expanded by more than ₹5,000 crore during this period. Yet the report proposes transforming PSU management from “production-based subsidies” to “consumption-based subsidies”. This is a political choice.
Production-based subsidies matter because service-based PSUs perform social functions that private firms evade due to profitability concerns. Consumption-based subsidies would push them to operate more like commercial enterprises, while the government compensates selected consumers separately. This often shifts public services from being universal rights to targeted benefits.
The same logic informs the report’s preference for municipal bonds. Urban local bodies need more funds, but municipal bonds are a poor substitute. Such instruments lock local governments to long-term debt obligations, and make them succumb to the irrational expectations of bond markets and credit-rating agencies. Across the world, these “lock-ins” have led to steep rises in user charges and property taxes, and subjected public services like water supply, sanitation, and transport to the metrics of financial returns. Leaning on this worldview, the report undermines the importance of expanded, certain and guaranteed revenue-sharing arrangements between local governments and the State government.
In sum, the UDF government’s fiscal report rests on a clear ideological position. Its vision of governance privileges market discipline over social investment, targeted welfare over universal provision, commercial viability over public obligation, and fiscal conservatism over developmental spending. This departs from Kerala’s historically evolved and consensual welfare-driven model, and may land the State with substantial social costs.
(R. Ramakumar teaches at the Tata Institute of Social Sciences, Mumbai and R. Mohan is a former officer of the Indian Revenue Service)
Published - June 13, 2026 02:32 pm IST