Kerala’s white paper: Five discontents

The “White Paper”, officially titled Kerala’s Fiscal Health: A Status Report, tabled in the Assembly last week, is an objective, timely and useful document for anyone interested in understanding the State’s financial position. Prepared by a three-member committee comprising two distinguished economists and a highly-regarded bureaucrat, it provides a pragmatic assessment of Kerala’s fiscal challenges.

The report’s seven chapters cover the structural roots of Kerala’s financial stress, fiscal discipline, public sector enterprises, KIIFB, development expenditure and the way forward. The data contained in the report was already available in the public domain. Its value lies in the committee’s analysis, conclusions and recommendations.

One upfront omission deserves mention. Reports of this nature normally reproduce the Government’s terms of reference and carry a formal letter of transmittal. Their absence leaves posterity without a clear record of the committee’s mandate and formal ownership of the report.

Most of the report’s conclusions are difficult to dispute. Kerala’s fiscal problems require better expenditure management, plugging of revenue leakages, improving tax administration, reforming public sector undertakings and rationalising and better targeting of subsidies. While India embarked on many such reforms post 1991, which continue even now, Kerala has been a reluctant reformer, whether under the UDF or the LDF.

The State’s developmental mindset is illustrated by the fact that until 2014, there was political consensus that National Highways in Kerala should not exceed 30 metres in width. Kerala has been smug for long about what is proudly claimed as the “Kerala Model”.

The report makes recommendations for course corrections. For instance, Kerala’s GST collection performance (SGST plus IGST share) has lagged the national average in recent years. Improving efficiency in tax administration is an obvious necessity.

Similarly, the recommendations on restructuring loss-making public sector enterprises, including the water, electricity and transport utilities, modifying pay revision cycles and raising the retirement age are also worthy of examination for rollout. The challenge lies in implementing them within Kerala's complex coalition politics. Though it is true that salaries, pensions and interest eat up a lot, higher than other States, is there anyway to reduce the outgo under these heads immediately?

Even as there are unexceptionables, there are discontents. Let’s look at just five of them.

First, the presentation of Kerala’s public debt required better contextualisation.
The report highlights Kerala’s debt of ₹5.07 lakh crore. It further discusses in detail the State’s reliance on Ways and Means Advances (WMA) and overdrafts. The debt figure is neither new nor unexpected. Borrowings are undertaken within limits approved by the Union Government under Article 293 and are managed through the RBI. As of now, Kerala’s debt is under authorised limits and is projected at ₹5.44 lakh crore in March 2027 (budget 26-27). So those who lose sleep over 5.07, please be prepared for 5.5.

The larger issue is the indefensible asymmetry between the Centre and the States in discourse on fiscal deficits (not Kerala alone). Under fiscal responsibility laws, both States and the Centre are to target a fiscal deficit of 3% of the GSDP/GDP. Not even a basis point difference between the Centre’s and the States’ targets . A comparison of the actual fiscal deficits of the Centre and Kerala is therefore not only in order, but required too.

The Centre has been operating at significantly higher levels of deficits, even touching 9.2 per cent in 2020-21, before bringing it down slowly to the current 4.4%. Indeed, in my view — as a firm votary of deficit-led development and welfare — this welcome flexibility enabled massive infrastructure spending on highways, railways and ports, supporting India's growth, the highest among all large economies, in the last 5 years.

Kerala’s problems should also be viewed in the context of constraints or limits imposed on all States by the Centre even as it has a free run on its deficit financing. The GOI debt is now 57% of the GDP at about ₹214 lakh crore (26-27). And 26% of the budget expenditure (the highest bulk item) of the Centre goes towards interest payments.

Kerala’s debt is about 34% of GSDP (admittedly higher than States’ average). But unlike the Centre, it spends a lower 17 per cent of its budget on interest payments. Yes, Kerala’s debt is elevated, but a higher fiscal deficit and borrowings will be required (maybe with a glide path downwards, if it comes to that ) to sustain welfare and development. Abrupt U-turns are not possible. The absence of such transparent contextualisation makes the report’s content problematic.

In a global era of development through deficit financing, both India and States will pull down much-needed growth if we are textual and rigid about deficits, as long as they are not monetised and the debt is in home currency.

Kerala should discuss with the Centre the need for a glide path in bringing down deficits to 3/3.5% over time. The LDF actually carried its brinkmanship with the Centre slightly far. In fact, thanks to the LDF, the Centre can say we can’t discuss with you because you are already before the Supreme Court. So let the judges tell us after the hearing.

Incidentally, many States like Bengal and Assam, where the “double engine” is in place, will require relaxations to deliver on election promises like higher welfare payments. It is hoped that the new Finance Minister, a pragmatist, will be able to break the Centre-State impasse.

Second, the report overplays WMA and overdrafts.
Both WMA and OD, are legitimate liquidity-management instruments provided by RBI. Any prudent treasury manager would utilise short-term borrowing at relatively low rates (say repo plus 1% at 6.25% or repo plus 2%, 7.25%) to bridge cash mismatches. The Centre itself routinely relies on Treasury Bills (90 to 365 days) at cheaper than Gsec yields for short-term financing.

Significantly, the RBI’s Report on State Finances (January 2026) merely records the use of these facilities by States without treating them as indicators of fiscal distress (2.30 of Chapter 2). Investors in government securities and State Development Loans rarely consider WMA or overdraft usage when evaluating State debt investments. Excessive attention to the availment of permitted borrowings was not required.

Third, the report’s “indictment” of KIIFB may lead to throwing the baby out with the bathwater.
KIIFB was created through legislation unanimously (sic) approved by the Kerala Assembly, including amendments passed in 2016. No party pressed for even a division. The assertion in the report that earmarking revenue streams such as motor vehicle tax and fuel cess breaches Article 266 of the Constitution is debatable. These revenue sources are contained in the Act itself. Actually, the committee’s view tantamounts to a larger question about legislative competence for the State Assembly.

About KIIFB’s present profile, let us accept that the debt market does not rate KIIFB badly. The ED investigation into the Masala Bond issue started in 2022. Post that, institutions like HUDCO, REC, PFC, Sagarmala and Nabard, (all under GOI) have lent large sums to KIIFB. KIIFB has been placing its audited financials and annual reports in the Assembly. Its not clear whether these were discussed in detail. In fact, the last annual report of KIIFB (March 2025) contains a mineload of information to assess KIIFB than the White Paper.

Unquestionably, that KIIFB has made contribution to physical infrastructure in all Assembly constituencies. While there could be many areas to improve in governance and operations, winding up KIIFB now will do more harm than good. I hope the Government may not be so keen on scoring self-goals.

Fourth, do we still live under Five Year Plans ?
The Planning Commission and Five-Year Plans belong to a bygone era. Kerala remains one of the few States that continues to maintain a Planning Board. Over the years, the Board has presented Economic Reviews with data that is at least a year old. Just before the 26-27 budget, the latest Review was released, which contains data from 24-25. No details, even about 25-26.

The distinction between Plan and Non-Plan expenditure has been given up by GOI. Public finance discussions should focus on revenue and capital expenditure. Institutions like the Planning Board, their contributions and terminology inherited from the Soviet planning era deserve re-examination.

Fifth, the authors overlook completely the problems in the cooperative sector.
Many cooperative institutions in Kerala are under severe financial stress, unable to repay depositors. All parties have cooperatives, neck-deep in trouble. NPA recognition norms are too liberal and not prudent. Actual assessment of bad loans could reveal significant weaknesses in the sector.The cooperatives can contribute to economic development only after comprehensive corrective action, including recapitalisation support.

Be that as it may, the White Paper is a valuable contribution to public debate. Most of its recommendations reflect the wisdom and experience of its authors. Yet a few observations and conclusions invite legitimate disagreement. They are, to borrow a familiar expression, like biting into a few stones in an otherwise satisfying mouthful of rice. It is hoped that the Finance Minister V D Satheesan —forward-looking and pragmatic — will be able to sift grain and chaff from the report card.