“Kerala’s Fiscal Health: A Status Report”, tabled in the assembly on June 4, is the newly elected United Democratic Front (UDF) government’s first formal assessment of the state’s finances. Prepared by a committee chaired by former cabinet secretary K.M. Chandrasekhar and the economists D. Narayana and C. Veeramani as members, the report seeks to establish a credible fiscal baseline and build a case for policy reform.While it presents itself as a diagnostic exercise, it carries an evident political purpose – attributing the state’s current fiscal difficulties to decisions made by the preceding Left Democratic Front (LDF) administration. The LDF leaders, meanwhile, accuse the UDF government of sidestepping the Union governments’ fiscal policy discrimination, thereby legitimising the neoliberal reforms underway in India.Structure over cycleThe report’s main claim is that Kerala faces a structural fiscal problem rather than a temporary imbalance. Unlike a cyclical deficit, which corrects itself as revenues recover, a structural deficit reflects a fundamental mismatch between a government’s commitments and its capacity to meet them. The supporting evidence is significant. Outstanding liabilities stand at approximately Rs 5.07 lakh crore, around 35.5% of GSDP.Source: “Kerala’s Fiscal Health: A Status Report“More revealing is their composition: salaries, pensions, retirement benefits and interest payments consume nearly 80% of revenue receipts, leaving barely a fifth to cover health, education, agriculture, local governments and capital works. Capital expenditure, at roughly 1.3% of GSDP, is less than half the national average, reflecting a severe compression of productive public investment.Also read: Why India’s States Are Spending More but Building LessThe report says treasury management has deteriorated sharply. In 2024–25, the state recorded negative balances in ten of twelve months, forcing unusually frequent recourse to the Reserve Bank of India’s Ways and Means Advances and overdraft facilities. Moreover, deferred liabilities exceeding Rs 48,000 crore have built up through unpaid dearness allowance arrears and related obligations – legally binding commitments that remain unsettled due to the absence of funds. Together, these indicators point to a state whose fiscal condition has moved well beyond routine stress.The question of fiscal conductThe committee stops short of attributing fiscal deterioration to deliberate wrongdoing – the report is not a forensic investigation and the language of reporting corruption is absent. Its criticisms of budget-making practice under the previous administration are, nonetheless, pointed. Revenue projections, it finds, consistently exceeded actual collections, while expenditure commitments were structured to move obligations off the main budget.The use of institutions such as Kerala Infrastructure Investment Fund Board (KIIFB)to accommodate spending that might otherwise have breached borrowing limits is characterised as fiscal concealment – the report’s own phrase is “financial sleight of hand”.The major concern is a sustained violation of the principle that borrowing should generate asset creation. When a government borrows to build a road, a school or a water facility, the resulting obligation is at least partially offset by an addition to productive capacity. When borrowings instead finance wages, pensions or servicing of earlier debt, obligations accumulate without any corresponding expansion in the state’s ability to meet them. The report argues that this is precisely what occurred, producing, over time, a self-reinforcing cycle of debt accumulation and shrinking fiscal room.CPI leader Pannian Ravindran speaks to members of the Kerala State Road Transport Corporation (KSRTC) pensioners organisation, protesting over delayed pension payments, in Thiruvananthapuram, Tuesday, October 21, 2025. Photo: PTIA considered assessmentThe report examines KIIFB – established in 2016 to accelerate infrastructure investment beyond conventional budgetary limits – with measured care. Its assessment is more balanced than either critics or defenders of the institution typically allow. On the positive side, the report acknowledges that KIIFB financed tangible infrastructure, including roads, bridges and school buildings, and that it introduced professional management capacity that the regular bureaucracy had lacked. These contributions are not dismissed.The liabilities, however, are substantial. KIIFB carries unmet obligations of approximately Rs 21,000 crore, with projects worth around Rs 35,000 crore yet to be funded. Although its borrowings are nominally off-budget, they are ultimately guaranteed by and fall upon the state treasury.Source: “Kerala’s Fiscal Health: A Status Report“Further, KIIFB borrowed at rates higher than those available directly to the state government, meaning that the cost of circumventing budgetary ceilings was itself elevated. Project selection also showed geographical concentration in certain districts without transparent developmental justification, raising questions of allocative efficiency. The committee recommends restructuring – integrating KIIFB’s obligations into the main fiscal accounts – within a more transparent framework.The federal dimensionThe report’s treatment of Union-state fiscal relations is also important. Analyses focused solely on state-level decisions risk misidentifying the sources of fiscal stress. The report identifies several changes in intergovernmental fiscal arrangements that have materially worsened Kerala’s position: the cessation of GST compensation payments; the reduction and eventual elimination of revenue deficit grants; tighter borrowing ceilings imposed by the Union government; the growing predominance of tied and conditional transfers over general-purpose grants; and a declining share in central tax devolution.Also read: Public Finance at a Crossroads: Federal Promises, Central Priorities, and Kerala’s Fiscal ChallengeFor a state that has historically depended more heavily on transfers from the Union government than resource-rich or industrially dominant states, these are consequential changes. The report’s acknowledgement of this dimension is a concession to fairness – the fiscal crisis, it implies, has co-authors at the national level.Migration and structural vulnerabilityThe report’s treatment of Kerala’s migration economy deserves attention, as this dimension is often considered separately from its fiscal implications. Approximately 2.2 million Keralites are employed abroad, with remittance inflows amounting to roughly 23% of net state domestic product – a proportion that has sustained household consumption, real estate markets and indirect tax revenues beyond what domestic employment alone could support.The report flags the risks of this dependence. Kerala’s educated workforce finds insufficient employment at home, producing both outmigration and elevated unemployment, particularly among women with tertiary qualifications. The remittance stream itself is vulnerable to geopolitical shifts, changes in Gulf labour market policies and fluctuations in energy revenues.What the report leaves inadequately examined are the longer-run demographic consequences: population ageing, emerging labour shortages in domestic sectors, the changing profile of return migrants and the mounting fiscal demands that an older population will place on pension, health and care systems in the decades ahead.Public Sector EnterprisesThe report’s stance on Kerala’s public enterprise sector indicates a major turn from the developmental orientation the state has maintained since 1957. Kerala has one of the largest public enterprise sectors among Indian states, and the report finds that accumulated losses have grown substantially, with Kerala State Road Transport Corporation, the Kerala Water Authority and Kerala Social Security Pension Limited identified as major sources of fiscal drain.The committee recommends restructuring loss-making entities, replacing production subsidies with consumption-targeted transfers and entertaining disinvestment, privatisation or closure for non-strategic enterprises. These recommendations carry social implications that the report does not adequately examine – particularly regarding employment, service access in remote and low-income areas and the distributional consequences of transitioning from state-provided to market-mediated services. LDF leaders say these recommendations signal an open call for privatisation.Fiscal compression and social equityAmong the report’s most consequential findings is the distributional pattern of fiscal compression. As finances have tightened, it is development expenditure that has been cut, not the salary or pension bills. Plan expenditure has stagnated, transfers to local governments have declined and allocations for Scheduled Castes, Scheduled Tribes, Other Backward Classes and religious minorities have fallen as a share of total plan spending. Agriculture, education and social services have all been squeezed.The burden of adjustment has fallen disproportionately on communities that depend most heavily on public expenditure for basic services and economic opportunity. If this continues, Kerala’s achievements in literacy, health, gender equity and social mobility will face gradual erosion – through the steady underfunding of the institutions that produced them.Salary and pension commitmentsThe report identifies salaries, pensions and interest payments as the primary drivers of revenue compression, together consuming close to three-quarters of revenue receipts. The committee’s discussion of how these commitments might be reduced, however, is limited.Conspicuously absent is any serious engagement with the political economy of reform – interventions in service conditions, retirement benefits or workforce size will face organised resistance from public sector unions. The report identifies the problem but stops well short of charting a credible path to resolving it.Planning institutions and the direction of development policyWhile the report does not call for the abolition of the State Planning Board, its overall orientation implies a reduced role for state-directed development strategy. The emphasis on attracting private investment, promoting industrial infrastructure and reforming land and labour regulations suggests that market activity is envisaged as the primary engine of economic transformation, displacing the traditional planning function of identifying priorities, coordinating investment and managing distributional outcomes.Also read: Centre Ignoring Real Issues Around States’ Debt Is Compounding the ProblemThe report does not seriously engage with how the Planning Board might be reformed and strengthened. The alternative it implicitly proposes – investment facilitation and fiscal consolidation – addresses a narrower set of problems than a comprehensive development strategy would demand. It also calls for greater collaboration with NITI Aayog, which could be an indication of a turn in the very planning process in future.Policy orientation and its implicationsWhile the report avoids the language of market liberalisation and consistently reaffirms Kerala’s welfare commitments, the cumulative direction of its recommendations – opening the power sector to private participation, restructuring or privatising public enterprises, relaxing land and labour regulations and constraining off-budget public institutions – shows a policy orientation that favours neoliberal market mechanisms over state-directed allocation.The question this raises is not whether markets have a role in Kerala’s development, but whether the proposed combination of reforms is compatible with the conditions under which Kerala’s development outcomes were achieved. That record, in health, education and social mobility, was built through sustained public investment, strong local institutions and redistributive policy.Whether fiscal consolidation and private investment can sustain that foundation, or will gradually weaken it, remains unresolved. The white paper is simultaneously a fiscal diagnosis and the intellectual basis for a significant policy reorientation. Both functions run through the text and must be read together. The central tension it identifies – restoring fiscal sustainability without undermining the public institutions that made Kerala’s development distinctive – is one the report poses but cannot itself answer. That task falls, at least in part, to the state budget due on 19 June.K.M. Seethi is director, Inter University Centre for Social Science Research and Extension and academic advisor to the International Centre for Polar Studies at the Mahatma Gandhi University (MGU) in Kerala. He also served as ICSSR senior fellow, senior professor of international relations and dean of social sciences at MGU.