Kerala, long hailed as India’s beacon of human development, is grappling with a severe debt crisis that threatens its fiscal stability and the sustainability of its celebrated “Kerala Model” of welfare-driven governance. The state’s financial troubles, marked by soaring public debt, high fiscal deficits, and strained revenue streams, have pushed it to the brink of an economic breakdown. This article delves into the causes, consequences, and potential solutions to Kerala’s fiscal woes, substantiated by the latest available data and projections for 2024-2025, while addressing why earlier figures remain relevant for understanding the crisis.
Kerala’s public debt has surged dramatically, reflecting a deepening financial quagmire. According to a Reserve Bank of India (RBI) report, the state’s total debt reached ₹4,29,270.6 crore by 2024, a stark rise from ₹1,86,453.86 crore in 2016-17—an 80% increase in just five years. The debt-to-Gross State Domestic Product (GSDP) ratio, a key measure of fiscal health, stood at 34.62% in 2022-23, well above the 23% threshold set by the Kerala Fiscal Responsibility Act of 2011. For 2024-25, the GSDP is projected at ₹13,11,437 crore, with the debt-GSDP ratio estimated to remain high at around 35%, signaling persistent fiscal stress. The revenue deficit, the gap between revenue receipts and expenditure, was ₹27,846 crore (2.1% of GSDP) in 2024-25 estimates, while the fiscal deficit, which includes borrowings, is targeted at ₹44,529 crore (3.4% of GSDP). These figures underscore a structural imbalance: Kerala spends far more than it earns.
The roots of this crisis lie in a mix of internal mismanagement and external constraints. Kerala’s revenue generation has consistently fallen short, with the state ranking seventh in indirect tax collection despite being India’s top consumer state. Economist Mary George estimates uncollected tax arrears could be as high as ₹40,000 crore, pointing to inefficiencies, bureaucratic lethargy, and systemic corruption. Committed expenditures—salaries, pensions, and interest payments—consume a massive portion of the budget. In 2024-25, Kerala is estimated to spend ₹97,978 crore on these, accounting for 71% of revenue receipts, among the highest across Indian states. This leaves little for capital expenditure, with only 3.85% of borrowings in 2019-20 allocated to productive investments, while 20.13% went to servicing past debts.
Off-budget borrowings (OBBs) through entities like the Kerala Infrastructure Investment Fund Board (KIIFB) and Kerala Social Security Pension Ltd (KSSPL) have further inflated liabilities. In 2022-23, KIIFB borrowed ₹5,109.24 crore and KSSPL ₹2,949.67 crore outside the state budget, contributing to a total debt closer to ₹4 lakh crore when included. The Centre’s decision to count these OBBs as state debt, closing a loophole in 2021, has restricted Kerala’s borrowing capacity. The Net Borrowing Ceiling (NBC) for FY24 was set at ₹32,442 crore, with an additional ₹1,787.38 crore allowed, but this still falls short of Kerala’s needs, leading to a Supreme Court challenge over fiscal federalism.
External factors have compounded the crisis. The Centre’s policies, including a reduced share of central tax revenue (from 3.88% to 1.92% over Finance Commission periods) and the cessation of GST compensation, have cost Kerala an estimated ₹1,07,513.09 crore between 2016 and 2023. The state argues that these measures, coupled with the NBC, encroach on its constitutional borrowing rights. In 2024, Kerala told the Supreme Court its debt constitutes only 1.7-1.75% of India’s total, refuting claims that it threatens national financial stability. Yet, the RBI categorizes Kerala among India’s five most indebted states, warning of potential ripple effects on the national economy.
The human toll is evident. In 2024, Kerala struggled to pay salaries to over half of its 5.15 lakh employees and delayed pensions for 50.48 lakh beneficiaries, requiring ₹770 crore annually. Fuel pumps turned away police vehicles over unpaid dues, highlighting the cash crunch. The opposition has criticized the Pinarayi Vijayan government for fiscal profligacy, citing examples like ₹40 lakh spent on a cow shed and ₹30 lakh on a swimming pool at the chief minister’s residence. The scrapped Silverline railway project is another flashpoint, seen as a misallocation of resources.
Why do 2023 figures feature prominently in this analysis? Comprehensive data from sources like the CAG and RBI often lags by one to two years due to audit and reporting processes. For instance, the CAG’s latest report, tabled in 2024, pegs Kerala’s public debt at ₹2.52 lakh crore for 2022-23, excluding OBBs, while RBI’s 2024 estimate of ₹4,29,270.6 crore includes these liabilities. For 2024-25, only projections or partial data, like budget estimates, are available, which may lack the rigor of audited figures. However, recent updates show progress: the debt-GSDP ratio fell from 35.92% in 2021-22 to 34.62% in 2022-23, and own tax revenue grew 23.4% from ₹47,661 crore to ₹71,968 crore over the same period. Finance Minister K.N. Balagopal claimed in February 2025 that Kerala has weathered the “most intense phase” of the crisis, with ₹750 crore allocated for Wayanad disaster victims and plans to sustain welfare schemes.
Despite these efforts, challenges persist. The 2024-25 budget projects 11.7% GSDP growth, but skepticism remains due to Kerala’s history of missing revenue targets. The state’s reliance on external borrowing, with public debt growth slowing to 8.19% in 2022-23 from 10.16% in 2021-22, raises sustainability concerns. Chief Minister Pinarayi Vijayan has called the 2025-26 budget an “illuminating roadmap” for sustainable development, but critics, including opposition leader V.D. Satheesan, label it a “false construct” lacking structural reforms.
To recover, Kerala must streamline tax collection, reduce committed expenditures, and prioritize capital investments over revenue spending. Exploring new revenue sources, such as revising electricity duties and court fees, as outlined in the 2024-25 budget, is a step forward. Resolving the Centre-state dispute over borrowing limits is crucial, as is leveraging Kerala’s strengths in tourism, IT, and remittances, which contributed ₹49,965 crore (31.2% of GSDP) in 2012. The state’s 6.6% GSDP growth in 2022-23, above the national average of 5.9%, and its low poverty rate of 0.71% offer hope, but only if fiscal discipline is enforced.
Kerala’s debt crisis is a stark reminder that even a state with enviable human development indices can falter without fiscal prudence. As it navigates this precarious landscape, the state must balance its welfare commitments with economic realities to avoid a deeper crisis that could undermine decades of progress.