Kerala’s fiscal status report: Its politics and economics

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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.

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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