FM-designate and the Kerala treasury: Between panic and prudence

In Kerala’s public discourse, the State’s financial position stands condemned even before a fair trial. The verdict is delivered with remarkable unanimity: the treasury is in ruins, the State is trapped in debt, and collapse is inevitable.

What fuels this indictment? “Kerala’s public debt has crossed ₹5 lakh crore. Borrowings continue to rise. Interest, salaries and pensions consume a large share of expenditure. The Government has repeatedly resorted to Ways and Means Advances, sought enhanced borrowing permission from the Centre under Article 293 of the Constitution, and even approached the Supreme Court over borrowing restrictions”. This is the narrative.

From television studios to academic seminars, the language has often been apocalyptic. Picha chatti eduthukazhinju — the begging bowl is out. Samsthanam kadakkeniyil — the State is in a debt trap. Kuthazhinja dhanakaaryam — public finance lies in tatters. Strikingly, such imagery has not been confined to political rhetoric; economists and retired bureaucrats too have amplified it.

As a Congress-led UDF government headed by VD Satheesan assumes office, the issue deserves examination with less hysteria and more perspective.

The latest Kerala Budget projects a fiscal deficit (FD) of around 3.4 per cent of GSDP for 2026-27, with the previous year estimated at roughly 3.7 per cent. Outstanding public debt is projected at about ₹5.44 lakh crore by March 2027. Budget documents place the debt-GSDP ratio around 33-34 per cent, though broader calculations that include off-budget borrowings place it somewhat higher.

The debate becomes more objective when these numbers are placed beside those of the Union Government. But why compare it with the Centre? Under the Fiscal Responsibility and Budget Management framework, both the Centre and the States are mandated to operate with a fiscal deficit target of 3 per cent.

Yet, in practice, while States are relentlessly lectured on prudence, the Centre’s FD climbed above 9 per cent during the pandemic and remains substantially above the original FRBM benchmark. Those elevated deficits were arguably justified in helping the economy navigate the post-Covid period.

But States, including Kerala, have largely been compelled to adhere to the 3 per cent norm. The obvious asymmetry rarely receives a convincing explanation. One argument is that the Centre bears defence expenditure and national infrastructure obligations. Fair enough. But if that was the rationale, why was a uniform benchmark prescribed in the first place?

Equally intriguing is the near-sacred status accorded to the 3 per cent number itself. Why 3 and not 4? Why not 2? The norm perhaps owes much to the Maastricht framework in Europe and to assumptions on savings-investment balances made decades ago. Yet today 3% is “economic theology”, largely immune from re-examination despite changing developmental realities.

Kerala’s present liquidity stress — from which the kadakkeny and picha chatti narrative flows — is closely tied to this borrowing architecture. Tamil Nadu and several other States too have sought slightly higher borrowing limits.

The same asymmetry exists with respect to debt ratios. Kerala’s debt-GSDP ratio of roughly 34 per cent is described as alarming. But the Union Government’s debt-GDP ratio is about 57 per cent. Even if one adopts the FRBM norm of 20 per cent for States and 40 per cent for the Centre, the question remains: why is 57 per cent treated as manageable while 34 per cent becomes fiscal catastrophe?

Critics then argue that Kerala’s problem lies not merely in debt, but in the composition of expenditure. Salaries, pensions and interest payments absorb a large share of revenue expenditure. This criticism is not entirely without merit. But nuance is again missing.

When Kerala spends on doctors, nurses, teachers and public health personnel, can this be dismissed as merely “unproductive revenue expenditure”? Kerala’s social indicators and public health outcomes did not emerge accidentally. Welfare is not always wasteful expenditure.

That said, there are areas where criticism is fully justified. Kerala’s five-year pay revision cycle is fiscally expensive compared with the ten-year pattern followed by the Centre and many States. Coalition politics over decades has also produced institutional excesses, creation of new Govt outfits and politically convenient expenditure.

Leakages and inefficiencies in welfare delivery persist. A substantial portion of social welfare pensions still remains outside a robust Direct Benefit Transfer architecture. Better targeting of subsidies, festival kits and universal entitlements is overdue. Loss-making PSUs and redundant boards cannot remain fiscally insulated forever.

But acknowledging these distortions is different from accepting the caricature that Kerala stands on the edge of insolvency.

The current stress is also the consequence of a borrowing framework controlled by the Centre, leaving States limited room for calibrated adjustment. Debt compression cannot be achieved through sudden fiscal strangulation. Public finance does not operate like household budgeting. Debt sustainability depends not merely on the size of debt, but also on growth, interest rates and the productive capacity of the economy. Even CAG observations have noted that Kerala continues to maintain a positive Domar gap, where nominal growth exceeds the interest rate on debt.

What Kerala requires now is neither denial nor panic. The State may need a credible glide path — perhaps allowing temporarily higher borrowing space before gradually returning to lower limits through expenditure discipline, sharper welfare targeting, improved revenue mobilisation, pruning of establishment expenditure, and monetisation of public assets.

Economic debate suffers when fiscal analysis degenerates into political theatre. The tendency to spend without prudence must certainly be questioned. But exaggerated funeral processions over Kerala’s finances, often led by sections of the economic clergy, help neither economics nor governance.

The task before the new FM-designate will be not merely to manage the treasury, but to restore balance, sobriety and transparency to the fiscal discourse itself.