Comment | Sword of Damocles over Kerala’s wealth

“Kerala’s financial stress is exacerbated by autonomous operations of the Kerala Infrastructure Investment Fund Board and public sector undertakings” | Photo credit: The Hindu

Tthe Kerala government’s high debt hangs like a sword of Damocles over the state’s ability to borrow and invest. The state’s fiscal and revenue deficits are above the median of the top 28 states. While the 2026 budget envisages a growth-led fiscal correction, the debt crisis requires an immediate solution, as the debt is caused primarily to finance current expenditure, not capital investment.

The financial stress is compounded by the autonomous operations of the Kerala Infrastructure Investment Fund Board (KIIFB) and Public Sector Enterprises (PSEs). The resulting losses are glaring. As the revenue deficit subsidy from the Union Government is now being reduced, covering these losses is all the more critical. Massive liabilities, expenditure and interest payments are tying the government’s hands as a status report for the details of the State Assembly. Surprisingly, the government’s capital expenditure is just 1.3% of its gross state domestic product, one of the lowest among Indian states.

Immediate results

The government urgently needs to improve the effectiveness of the revenue and expenditure framework. Greater drawdown of Centrally Sponsored Scheme funds, whose drawdown is chronically below entitlement levels, offers immediate funding without incurring new debt. The program of Special Assistance to States for Capital Investments, which are 50-year interest-free capital loans from the Centre, remains underutilized. The 16th Finance Commission Municipal Local Body Grants offer another avenue if municipalities collect taxes that support these transfers.

Moreover, tax revenue growth can be significantly improved. Economic growth was nearly 10% last year, but taxes only rose 3%, a tax increase of only 0.3. The state must face massive revenue arrears and curb off-budget borrowing, the Comptroller and Auditor General said. Kerala can also strengthen tax compliance by overhauling its Goods and Services Tax (GST) administration, increasing the number of GST registrations, improving targeted tax information systems and ensuring timely audits. GST revenue growth was 3% in 2025-26 compared to 6% nationally.

The government could also explore increasing fees across ministries to generate more non-tax revenue. Priority sectors would be port management, building permits, mining fees and forest production. There could be higher user fees for high-end government services such as specialized skills training.

Long-term improvements

Beyond the quick fixes, the fiscal reform agenda is in order, as the Sacred Heart College report outlines. Addressing PSE losses should be a priority. Independent review is required for KIIFB funded projects. It is also high time to introduce proven models of private participation in PSE.

The second area would be sources of finance. As in Indonesia, a professionally managed state intermediary can help attract capital. Private investment can be made less risky by announcing transparency and predictability in politics. The government can lease, not sell, land for industrial zones and IT parks. Urban local authorities could access capital markets through bonds backed by property taxes, user fees and land rental income. Kerala diaspora bonds could be RBI compatible instruments through which NRIs can invest in projects.

Third, the spending side of the ledger needs a better look. For every ₹100 of revenue, ₹77 is earmarked in advance for salaries, pensions and interest payments, reducing the government capacity of the state. There is good reason to initiate pension reform.

Fourth, errors of commission should be avoided. Encouraging mining on fragile hilltops for revenue would be self-defeating. Similarly, allowing private participation in sand mining would be destructive, as the damage caused by the destruction of the environment would exceed any taxes collected. While it is tempting to cut welfare programs in the name of fiscal austerity, it would be a mistake to reverse schemes that provide safety nets for the extremely poor.

Kerala’s development potential is well known, but the fiscal crisis is an obstacle to its realization. The state must immediately enact steps to increase revenue within the existing fiscal framework.

Vinod Thomas is a former senior vice president of the World Bank; C. Veeramani is Director, CDS, Thiruvananthapuram.

Published – 01 Jul 2026 01:09 IST