Kerala’s fiscal worries – The Hindu

A.VD Satheesan, Kerala’s Leader of Opposition for the last five years, in his first press conference after the landslide victory of the Congress-led United Democratic Front (UDF) in the 2026 Assembly elections, claimed that the UDF “inherited” an almost empty State treasury. “A treasure trove so empty that a cat and her kittens had made it their home,” Mr. Satheesan joked. Humor aside, Kerala’s finances will be in focus as the new UDF government takes office. The state’s fiscal health and the Union’s fiscal policies towards Kerala have been the prevailing theme throughout the 10-year rule of the Left Democratic Front (LDF) in Kerala. It never deviated from the center of LDF-UDF interactions and often shaped the discourse of Centre-State relations.

The biggest claim of the Pinarayi Vijayan government was that it had achieved rapid development by overcoming the policies of the aggressive Union government. Mr. Satheesan and the UDF have been vocal critics of the Left’s fiscal policy and its dismal failure to force Mr. Vijayan’s Bharatiya Janata Party (BJP) government to give up the State’s rightful share of financial resources. UDF also put pressure on the Kerala Infrastructure Investment Fund Board (KIIFB), a special purpose vehicle used by the LDF government to mobilize funds for large-scale infrastructure projects when it came to power in 2016. He questioned LDF’s KIIFB model, arguing that extra-budgetary borrowings through KIIFB would drag the State into a debt crisis. The UDF gained its ammunition from multiple reports of the Comptroller and Auditor General, which warned that unchecked extra-budgetary borrowings would land Kerala in a serious debt trap. The Central government also frowned upon borrowings through KIIFB and treated them as direct debt of the State government. In January 2023, the Opposition UDF published a white paper on the State’s finances. The document accused the LDF government of plunging Kerala into financial crisis and “toxic debt” through mismanagement, unbridled spending and subpar tax collection.

daunting challenge

Outgoing Finance Minister KN Balagopal denied Mr. Satheesan’s allegations that the UDF had inherited an empty treasury from the LDF. According to him, Kerala is now in a much better financial position and multiple fiscal indicators, including the debt to Gross Domestic Product (GSDP) ratio, confirm this.

However, reshuffling a fiscal landscape shaped by Left perspectives will be a daunting task for whoever takes charge as Kerala’s new Finance Minister. Our primary job will be to ensure the smooth operation of the treasury. Kerala’s fiscal model is marked by high expenditure on salaries, pensions and interest payments, and large expenditure on social welfare. The limited space to improve its own tax revenues, the ability to negotiate the dynamics of the Union’s fiscal policies in relation to the restricted borrowing space of the State and the consequences of the decisions of the 16th Finance Commission create difficulties. While Kerala’s divisible tax pool share increased from 1.92% to 2.382%, the 16th FC did not recommend revenue gap grants, sector-specific grants or State-specific grants. The Medium Term Fiscal Policy document had stated that Kerala was facing fiscal stress due to “suspension of goods and services tax (GST) compensation, revenue deficit grants, reduction in central share of taxes and reduction in benefits from Centrally Aided Schemes”. It will be the new government’s primary responsibility to mobilize additional revenue, drive development forward and deliver on the five guarantees in the election manifesto. For example, UDF is expected to keep its promise that monthly welfare pensions will be increased to ₹3,000. Currently, these pensions of ₹2,000 are paid to around 60 lakh people. At the press conference on May 4, Mr. Satheesan promised “results” such as sound fiscal management, effective tax administration and measures to replenish the treasury. At this point, it would not be wrong to speculate whether the new government will choose to publish a white paper on the state of State finances. Perhaps the nature of the allegations heard by the people of Kerala on the issue may not have been given in time.