Kerala budget: Will KN Balagopal make it ‘the art of the possible’?

Of all the 28 States constituting the Indian Union, perhaps no other State faces the unique dilemma of reconciling financial pragmatism with the heavy baggage of ideological posturing quite like Kerala. The contradiction between theory and practice has become a defining feature of governance in the State.

The Left Democratic Front (LDF) government, led by the CPM, has been walking a fiscal tightrope in managing the State’s finances. Increasingly, it has been forced to promise and occasionally propose measures that represent significant departures from its long-held ideological positions. At no time is this delicate balancing act more evident than when the Finance Minister rises in the Assembly to present the State’s annual Budget.

In 2023, K N Balagopal, Kerala’s soft-spoken and unassuming Finance Minister, proposed allowing plantations to cultivate fruits and vegetables—marking a significant deviation from the Kerala Land Reforms Act, 1963. That legislation remains one of the most enduring legacies of the Left governments that ruled Kerala during the 1960s. No sooner had the proposal been announced in the Budget than the CPI, the CPM’s comrade-in-arms within the ruling front, publicly aired its reservations on ideological grounds. The proposal remains in cold storage to this day.

A similar fate befell another reformist proposal: permitting foreign universities to operate in Kerala, included in the 2023–24 Budget. Once again, ideological resistance from within the Left camp proved decisive, with the CPM’s political ally throwing a spanner in the works. The proposal never progressed beyond the announcement stage and was stillborn.

As Balagopal prepares to present what will likely be the last Budget of the present Government—with Assembly elections due in about two months—it will be instructive to observe how he continues this high-wire act. With the State strapped for funds and its demand for a higher level of market borrowing stuck in litigation before the Supreme Court, key attention will be on how the Finance Minister proposes to balance the books this time around.

A substantial portion of the State’s expenditure capacity in the coming fiscal year will also depend on the recommendations of the 16th Finance Commission, expected to be presented to Parliament during the Union Government’s Budget Session. One of the LDF’s perennial grievances has been the sharp reduction in Kerala’s share of the divisible pool of central taxes—from over 3 per cent earlier to just 1.92 per cent in recent years.

Given that nearly 70 per cent of the State’s expenditure is committed—towards salaries, pensions, and interest payments—the Finance Minister will have to be genuinely innovative in outlining how resources will be mobilised to fund both existing and new welfare measures, not to mention capital expenditure. Since 2016, Kerala has increasingly relied on the KIIFB route—a statutory body exclusively tasked with financing infrastructure development—to upgrade physical infrastructure such as State roads, schools, and hospitals.

Despite sustained criticism and even scrutiny by the Enforcement Directorate over its 'masala bond' issuances, KIIFB’s track record deserves acknowledgement. The agency has approved projects worth nearly ₹75,000 crore over the past few years, with actual spending or disbursement touching around ₹35,000 crore. Government schools in Kerala, which provide free education, now rival many private schools in terms of infrastructure quality, smart classrooms, and computer laboratories.

What, then, are the key challenges the upcoming State Budget must address? It is also worth noting the convention that Finance Ministers generally present only an interim Budget when Assembly elections are imminent.

In my view, there are six critical areas where the State will have to innovate:

•With borrowing tightly constrained by the provisions of the FRBM Act and restrictions under Article 293 of the Constitution, what exactly is Kerala’s much-touted “Plan B” for resource mobilisation? There is little clarity on how the State proposes to increase its own revenues or curtail expenditure, given the narrow fiscal space and the Union Government’s firm stance on borrowing limits.

•Kerala’s cooperative sector is in deep distress. While a few high-profile cases—such as the Thrissur-based Karuvannur Cooperative Society and the Nemom Society—have made headlines, with thousands of depositors unable to access their savings, unofficial reports suggest that many more cooperative institutions are facing severe liquidity stress. Depositors’ funds are increasingly at risk of non-repayment. The Finance Minister will need to address this systemic problem squarely. Will there be a credible action plan to restore confidence and stability in the cooperative credit system?

•What is the State Government’s strategy for utilising the Centre’s 50-year interest-free capital expenditure loans, provided under the Scheme for Special Assistance to States for Capital Investment (SASCI)? These loans are over and above the 3 per cent fiscal deficit limit. The data below shows how Kerala has lagged behind even neighbouring southern States in availing this facility. Notably, even West Bengal has so far accessed ₹22,000 crore under this scheme.

•What will be the Budget’s proposals on retail price regulation? Even as inflation at the all-India level has been trending downward, Kerala has emerged as a worrying outlier. Inflation in Kerala at the end of December stood at 9.49 per cent, compared to just 1.33 per cent at the national level. Other southern States reported much lower inflation: Karnataka at 2.99 per cent, Andhra Pradesh at 2.71 per cent, and Tamil Nadu at 2.67 per cent.

•What concrete support mechanisms will be announced for investment proposals emerging from the Global Investors Meet held in Kochi in 2025, as well as the positive response from Global Capability Centre (GCC) operators? At Davos, the Industry Minister and his team signed an MoU with ANSR. Kerala already accounts for roughly 20% of EY’s total India workforce, with around 10,000 employees engaged in AI, analytics, cybersecurity, and blockchain. This mirrors the GCC-driven employment momentum currently seen in Tamil Nadu and Karnataka.

•Finally, how much will the State allocate towards strengthening public healthcare infrastructure? Kerala’s much-celebrated healthcare system is fraying at the margins due to shortages of dialysis machines, operating theatre equipment, and even basic hospital beds. On the education front, how does the State plan to bridge the funding gap created by its refusal to participate in the PM SHRI scheme, resulting in a loss of nearly ₹1,100 crore, including expenditure already incurred?

Social welfare pension is now ₹2,000 per month. There will be a temptation to hike it to ₹2,500. But what about resources for these cash transfers?

Kerala’s Budget size is approximately ₹2 lakh crore. To mobilise resources meaningfully, bold steps—including selective disinvestment, monetisation of land and other assets, enforcement of rational user fees for public services, and a willingness to shed ideological inhibitions through greater use of PPP models—are what one should look for in this year’s State Budget.
(The author is a commentator on banking and finance. Views are personal.)