The building fiscal stress in the Kerala Model | Number Theory

.

Kerala will vote to elect a new government tomorrow. The campaign has seen competing promises on welfare and government jobs. For a state which has taken pride in carving out a governance exceptionalism often portrayed as the Kerala Model, these promises entail an embrace of populism. But such promises will require a reckoning with the state’s fiscal problems.

A glimpse of people during the public meeting ahead of the Kerala Legislative Assembly elections in Thiruvalla. (X)

The building fiscal stress in the Kerala Model

• 
  Kerala’s fiscal deficit is higher than average and has a perverse revenue deficit bias

  Kerala’s fiscal and revenue deficits peaked at 5.3% and 3.4% of gross state domestic product (GSDP) in 2020-21 during the Covid-19 shock. They eased sharply to 2.5% and 0. 9% by 2022-23 before rising again to 3.9% and 2.5% in 2024-25. 2026-27 budget estimates show a modest easing to 3.4% and 2.1% by 2026-27. Not only is Kerala’s fiscal deficit high, it also has a perverse revenue deficit bias. A report on Kerala’s finances prepared by the Centre for Development Studies (CDS) for the 16th Finance Commission notes that “revenue deficit accounts for a substantial portion of the fiscal deficit, suggesting the borrowed resources are used for meeting current consumption expenditure of the government.” This means that much of the state’s borrowing is meant for meeting its day-to-day expenses rather than being utilised for asset creation that will add to future growth.
• 
  Almost three-fourth of Kerala’s revenue receipts are exhausted in pre-ordained commitments

  Revised estimates for 2025-26 shows that pensions alone accounted for 21.5% of the state’s revenue receipts, the second-highest burden among major states after Himachal Pradesh, according to data from the Centre for Monitoring Indian Economy (CMIE). In fact, salaries and pensions together have absorbed more than half of Kerala’s revenue receipts for much of the past three decades. The 2026-27 budget estimates that Kerala’s committed expenditure, mainly salaries, pensions and interest payments, will take up 71% of projected revenue receipts, while the state’s medium-term fiscal policy statement says revenue expenditure is set to rise partly because of pay revision and DA and DR disbursements. This leaves little room for other spending, hence the higher revenue expenditure deficit.
• 
  Debt has come off the peak but is still on the higher side

  Kerala’s debt as a share of GSDP rose from about 25% in 2012-13 to 32 % by 2019-20, before surging to 38.5% in 2020-21 amid the Covid-19 shock. Since then, the ratio has eased, falling to 34.2% in 2023-24 and is projected at 33.4% in 2026-27. It is expected to ease to 33.3% by 2028-29. The CDS report notes that Kerala’s debt burden has remained consistently heavier than the other states. In 2023-24, for instance, Kerala’s outstanding liabilities were 34.9% of GSDP against 27.6% for all states. Even over the full 2012-13 to 2023-24 period, Kerala’s outstanding liabilities at 32.27% was far above the all-state average of 25.59%. Adding to the burden is the dispute over off-budget borrowing. The CDS report, citing CAG data, says such liabilities rose from ₹14,142 crore in 2019-20 to ₹29,476 crore by 2022-23. While the central government treats these as part of Kerala’s public debt since they are ultimately serviced through the budget, the state argues that counting them, especially Kerala Infrastructure Investment Fund Board’s commercial borrowings, has unfairly shrunk its borrowing space.
• And the state is lacking in efficacy when it comes to raising taxes

  Kerala’s own tax revenue was 6.1% of its GSDP in 2024-25, the latest period for which comparable numbers are available for other large states. This puts Kerala in the middle of the pack among large states, which does not really help a state that has higher-than-average debt and deficit levels and wants to spend more on populist benefits. Irrespective of what happens in the elections, the new government which takes office after elections will have its task cut out. Fiscal prudence will have to be given high priority.