Kerala Stands Strong Amid Crises

K.N. Balagopal Minister for Finance

The 2025-26 budget speech opened with a bold declaration that Kerala has successfully navigated a severe financial crunch. Despite economic constraints imposed by the central government, the state has ensured continued funding for developmental and welfare initiatives. Over the past four years, Kerala has faced significant economic challenges but has persevered through meticulous financial planning and prudent management. Alongside, capital investment in the state has nearly doubled.

Kerala’s resilience stems primarily from a significant increase in its own revenue. In 2011-12, the state’s tax revenue stood at Rs.25,718 crore. By 2016-17, during the first year of the Pinarayi government, this had risen to Rs. 42,176 crore. The trend continued, reaching Rs. 47,661 crore in 2020-21. Under the current LDF government, tax revenue increased to Rs. 8,341 crore in 2021-22, Rs. 71,968 crore in 2022-23, and Rs. 74,329 crore in 2023-24. For the ongoing f iscal year (2024-25), revenue is projected at Rs.81,627 crore, with a target of Rs.91,515 crore for the next financial year. Non-tax revenue has also seen substantial growth. In 2011-12, it stood at Rs.2,592 crore, rising to Rs.9,699 crore by 2016-17. Though it dipped to Rs.7,372 crore in 2020-21, the current government managed to raise it to Rs.10,463 crore in 2021-22, Rs.15,118 crore in 2022-23, Rs.16,346 crore in 2023-24, and subsequently to Rs.17,906 crore in 2024-25. The target for 2025 26 is Rs.19,145 crore.

Declining central revenue share

Kerala’s share of central revenue has been steadily shrinking. In 2016-17, the state’s revenue stood at Rs.75,612 crore, of which Rs.23,735 crore (32%) came from the central government. By 2020-21, this increased to Rs.42,629 crore (44%). However, the decline began soon after wards with Rs.47,837 crore (41%) in 2021-22, Rs.48,230 crore (36%) in 2022-23, Rs.33,811 crore (27%) in 2023-24, and just Rs.33,397 crore (25%) in 2024-25. Compared to 2020-21, this marks a nearly 20% drop. According to the Accountant General’s preliminary estimates, by January 2025, Kerala had received Rs.2,942.29 crore less from the Centre than in the previous year.

Public and capital expenditure

Between 2011 and 2016, Kerala’s average annual public expenditure under the UDF government was Rs.68,169 crore. Under the first Pinarayi government (2016-2021), this rose to Rs.1,15,378 crore. Over the past four years, under the current government, average public expenditure has reached Rs.1,65,061 crore. The total expected expenditure for 2025-26 is Rs.2,00,354 crore. Capital expenditure has also grown. In 2022 23, it was Rs.16,787.49 crore, rising slightly to Rs.16,880.17 crore in 2023-24. By January 2025, capital expenditure stood at Rs.13,578.92 crore, reflecting an increase of Rs.731.63 crore over the previous year. This increase in development spending has occurred despite central restrictions on state borrowing and reduced grants-in-aid.

Challenges ahead

According to the 15th Finance Commission, the central government retains 62.3% of national revenue, while states receive only 37.7%, despite bearing 62.5% of total public expenditure. Kerala’s share in the divisible pool of central taxes is a mere 1.925%, whereas Uttar Pradesh receives 17.94%, Bihar 10.06%, Madhya Pradesh 7.85%, West Bengal 7.52%, and Maharashtra 6.32%. Though the 15th Finance Commission recommended that states receive 41% of central revenue, in practice, they receive less than 30%. T he introduction of the Goods and Services Tax (GST) severely curtailed states’ taxation powers. T he Centre initially provided GST compensation to offset revenue losses, but this was discontinued in June 2022. Despite the economic impact of COVID-19, which stunted revenue growth for nearly two years, the compensation period was not extended, resulting in an annual revenue loss of Rs.12,000 crore for Kerala. Kerala’s share in the divisible pool was 3.8% under the 10th Finance Commission, reduced to 2.5% under the 14th, and further slashed to 1.92% under the 15th. This reduction alone resulted in a Rs.25,000 crore revenue loss for the current government over four years. In additions, loans taken for KIIFB and the Pension Company too were classified as state debt, leading to an additional revenue loss of Rs.16,433 crore. Public account funds such as deposits from employees and the public in the treasury were also classified 48 as state debt, reducing Kerala’s borrowing limit by Rs.39,720 crore. Despite these financial constraints, Kerala continues to progress. In 2024-25, 75% of the state’s revenue came from its own sources, with only 25% from the Centre, whereas many other states receive 50% to 70% of their revenue from central assistance. Even amid financial restrictions, the second Pinarayi government has successfully ensured that development and welfare programs remain uninterrupted.

Commitment to fiscal responsibility

T he government is prioritising expenditures, strictly controlling unnecessary spending and focusing on social security and welfare initiatives. Additional financial responsibilities, such as salary and pension revisions and social security pension increases announced by the previous administration, have been absorbed by the current government. T he salaries of ASHA workers have been increased twice under this administration. A significant financial burden has been borne for KSRTC, and funds have been allocated to clear KTDFC’s liabilities. Financial support has also been extended outside the budget to KFC, KSFE, Kerala Gramin Bank, Kochi Metro Rail, and Kannur Airport. T hings have come to such a point that Kerala is solely financing the Vizhinjam Port Project. In centrally sponsored schemes, the central share has been drastically reduced or withdrawn entirely. As a result, crucial sectors such as scheme workers, NHM, paddy procurement, maternal and child nutrition programmes, welfare pensions, and public education face mounting financial pressure. Despite these constraints, the state continues to sustain its achievements and push forward in various sectors. If the funds that are rightfully owed to Kerala were received, timely payments to government employees and other groups would have been made.

Welfare pension arrears cleared

Since March 2024, welfare pensions have been distributed monthly. Two out of the f ive instalments of pending payments have already been disbursed, with the remaining arrears set to be cleared within the upcoming financial year that begins in April.