Kerala faces a growing fiscal crisis that is as much a reflection of its own financial planning as it is a consequence of the Union government’s indifference to the state’s needs. The state, long admired for its outstanding social indicators and progressive policies, now finds itself on the edge of a financial precipice, with the weight of mounting debt and declining central transfers pushing it closer to the brink.
This crisis, however, is not the result of poor fiscal management at the state level—it is the product of a systematic erosion of Kerala's rightful fiscal space by a central government that seems more interested in consolidating its own power than in equitably distributing the nation's resources.
The figures speak volumes. Kerala's GSDP for 2024-25 is projected at ₹13.11 lakh crore, reflecting an 11.7% growth, which, at first glance, appears to suggest a healthy economy. Similarly, the state’s per capita GSDP of ₹2,95,787 in 2022-23, significantly above the national average, further suggests that Kerala should be in a strong position to weather any financial storm. But the issue lies in the details, and those details expose a grim reality. Despite its relatively high-income levels, Kerala is being denied the financial autonomy it needs to maintain the very services that have earned it a global reputation for human development.
Central to this crisis is the stark reduction in Kerala's share of the central tax pool. The share of central transfers to the state, which constituted 41.01% of its revenue receipts in 2021-22, plummeted to just 34.39% in 2022-23. This sharp decline is not a mere technical adjustment; it is a deliberate policy shift by the Union government, which has increasingly centralized fiscal powers in New Delhi. By cutting Kerala’s rightful share of central taxes, the Union is effectively crippling the state’s ability to fund its own development.
This is compounded by the cessation of GST compensation in June 2022, a decision that has cost Kerala approximately ₹12,000 crore in 2024-25 alone. For a state that has already demonstrated the success of its welfare programs, this move is nothing short of punitive, aimed at reducing Kerala’s financial autonomy and forcing it into fiscal dependence on a government that is neither forthcoming nor sympathetic to its needs.
At the same time, Kerala’s fiscal deficit is soaring, with the state projecting a fiscal deficit of ₹44,529 crore in 2024-25, or 3.4% of its GSDP. The growing revenue deficit, expected to reach ₹27,846 crore (2.1% of GSDP), is a clear indication of the fiscal imbalance. Yet, the Union government’s response to these challenges has been nothing less than negligent.
The central government has set Kerala’s borrowing limit at ₹18,000 crore for 2024-25, a figure bitterly inadequate to meet the state’s mounting needs. Kerala’s request for a special financial package of ₹24,000 crore has been met with deafening silence, stressing the Union’s disregard for the state’s financial distress.
The Union’s indifference is most evident in its failure to provide the necessary financial support for key development projects in Kerala. For example, the Kerala Infrastructure Investment Fund Board (KIIFB) has allocated ₹1,000 crore for the ambitious economic triangle project, linking Vizhinjam, Kollam, and Punalur, but this is far from enough. The lack of sufficient funding from the Union has delayed the completion of crucial infrastructure projects such as the Vizhinjam International Seaport, a project that could strengthen Kerala’s regional and global economic standing. Instead of promoting such key investments, the Union government seems intent on constraining Kerala’s ability to develop its infrastructure, despite the fact that this would benefit not only the state but the entire nation.
And then there is Kerala’s burgeoning debt, which now stands at ₹3.8 lakh crore—nearly 30% of the state’s GSDP. While the state has been able to manage its debt thus far, the continued fiscal strangulation by the central government means that this is unlikely to be sustainable in the long term. Kerala's debt, much of it incurred for vital development projects and social welfare programs, is a direct consequence of the central government’s unwillingness to adequately support the state’s financial needs. The fiscal policy of the Union government has placed Kerala in a position where it must choose between its social programs and its fiscal health, a dilemma that should never have existed.
One must ask: What is the Union government’s endgame? Is it to decimate the fiscal autonomy of states like Kerala, which have long been at the forefront of progressive development, in favour of a more centralized, authoritarian model of governance? Kerala's plight is not unique, but it is a stark example of how the central government’s fiscal policies are pushing states to the brink.
The Union’s refusal to allow Kerala the financial leeway it needs to fund its development is both shortsighted and dangerous. It is shortsighted because it undermines the very development model that has made Kerala a global success story, and it is dangerous because it erodes the trust between the Centre and states, creating a precedent for further financial centralization that could have long-term repercussions for India's federal structure.
As Kerala's fiscal health deteriorates, one cannot help but wonder whether the Union government’s policies are motivated by a genuine concern for the country's fiscal stability or whether they reflect a broader agenda to control resources and limit the autonomy of states. Kerala’s demand for greater financial support is not just a plea for handouts; it is a call for justice, for the equitable distribution of resources that respects the contributions of all states to the Union.
For the sake of Kerala, and for the sake of India’s federal structure, the Union government must reconsider its approach. It must restore Kerala’s rightful share of central taxes, reinstate the GST compensation, and provide the financial flexibility the state needs to continue its development trajectory. Failing to do so will not only undermine Kerala’s social achievements but will also set a dangerous precedent for the future of India’s states.
In this moment of crisis, Kerala deserves the Union government's support, not its disregard. It is time for the Centre to change course before it is too late.
Yadul Krishna is a Policy Economist. As the Parliamentary Secretary to a Rajya Sabha MP from Kerala, he drafted “The Bhagat Singh National Urban Employment Guarantee Bill, 2022”, which was successfully introduced in the Indian Parliament. X: @Yadul_Krishna
