An existential crisis: How will Kerala ringfence its famed welfare model?
Mail This Article
“This Budget is being prepared with the hope that things will improve. But what if the Central government takes steps to further centralise the fiscal system? What if the neglect towards Kerala persists? In such a case, we will certainly need to come up with a Plan B." This was how Kerala’s Finance Minister outlined his government’s approach to navigating the state’s financial crisis while presenting last year’s budget.
Since then, fiscal tension with the Centre has been ratcheted up with the state government filing a petition in the Supreme Court, seeking permission for Kerala to increase its borrowing capacity. This issue has now been referred to a Constitution bench.
A bench comprising Justices Surya Kant and KV Viswanathan acknowledged the significant “constitutional” questions raised in the petition, particularly regarding the interpretation of key Articles of the Constitution in relation to Centre-State relations.
A crucial question posed by the bench for consideration by the constitution bench is whether Article 293 provides a state with an enforceable right to raise borrowing from the Union government or other sources. If so, to what extent can the Central government regulate such a right?
Article 293 (which deals with states' borrowing powers) has yet to be subjected to any authoritative interpretation by the Supreme Court. Therefore, the issues raised by Kerala squarely fall under the purview of Article 145(3) (which allows for a reference to a five-judge bench), according to the Supreme Court.
The upcoming 2025-26 budget, scheduled to be presented to the Assembly on Friday, will be particularly significant as KN Balagopal will outline measures for managing the State’s finances under what the ruling LDF perceives as “politically motivated restrictions” imposed by the Centre. Will his Plan B be credible and viable?
The State’s finances are in a precarious situation, with delayed salaries and pensions for government-linked institutions, outstanding Dearness Allowance (DA) arrears, public utilities like KSRTC, KWA, and KSEB struggling for funds, and the social welfare pension payments delayed. Economic growth has also been sluggish, falling below the national average.
The Economic Review, compiled by the State Planning Board and presented to the assembly a day before the budget, is typically based on data that is at least two years old. The review for this year will, at best, cover the state’s economic performance in 2022-23, while the budget will rely on growth projections for 2025-26. For any meaningful analysis not only should the review contain details of current year’s growth but the Board’s assessment of the growth rate for the next year.
The absence of recent data on the state's economy remains a significant handicap for analysing the budget. While the Union government and other states, (for instance Odisha), provide figures for the current financial year as part of their surveys, Kerala has yet to update and share comparable data for analysis.
According to the available data from the economic survey of last year, the state’s Gross State Domestic Product (GSDP) growth in 2022-23 was lower than the national rate. The State Planning Board reported that Kerala's GSDP grew by 6.6%, while India's growth rate was 7%.
In the absence of updated data, a useful proxy for evaluating the current state of the economy is GST collection figures. According to data from the Union government (gst.gov.in), Kerala’s GST collections for January 2025 showed a 6% year-on-year increase. For comparison, let’s look at GST growth figures in the southern states and the national average:
Except for Andhra Pradesh, Kerala's GST growth is significantly lower than the national average and much lower than other comparable southern states. This could indicate two possibilities: either tax collection efficiency is compromised in Kerala, or the state’s economic growth has been adversely affected this year.
The slow GSDP growth stands in stark contrast to the state’s exemplary social indicators. According to NITI Aayog's Multi-Dimensional Poverty Index, Kerala has the fewest poor people of any state in India. The state’s social indicators—comparable to those of developed nations—are much better than most large northern states. Take, for instance, the infant mortality rate. In 2023, Kerala’s rate was 5.05%, while the provisional rate for the US was 5.61%.
Prioritising education and healthcare, Kerala ensures that no section of society is excluded from mainstream development, a situation often highlighted by its vigilant media.
The dilemma for the LDF government will be how to balance the funding required for the Kerala welfare model with the restrictions imposed by the Fiscal Responsibility and Budget Management (FRBM) Act, especially with an economy seemingly in low gear. The Kerala Infrastructure Investment Fund Board (KIIFB) model of off-budget borrowing has attracted much criticism from the opposition and BJP. The state government’s reported move to levy user fees on KIIFB-funded roads has already faced a backlash.
The government spends nearly 70% of its budget on salaries, pensions and interest on government debt with with very little left for development or infrastructure spend.
Efforts are being made to highlight Kerala’s readiness to promote entrepreneurship and equity investment. The State is actively seeking large investments. The government hopes that Vizhinjam project, greenlighted by the previous Oommen Chandy government, will become the anchor for collateral investments. Recently, the Industry Minister and a group of bureaucrats attended the World Economic Forum in Davos, marking a first for the CPM-led government. At the end of this month, the state will host an international investor meet in Kochi.
But the key question remains: what will the upcoming state budget unveil, given the current financial constraints? What the common people will look for is not merely a routine statement of income and expenditure, but a credible manifesto for the sustainability of Kerala’s welfare model, which is in an obvious existential crisis.
(S Adikesavan is a commentator on economy and banking. Opinions expressed are personal)