Kerala’s fiscal debate needs less gloom-doom and more perspective

“I am not happy, and I will not allow you to be happy… I am not okay, and I will not allow you to be okay… the sense of pessimism that filters around all conversations… is very defeatist”. That was how Prof Debashis Chatterjee, Director of IIM Kozhikode, described the Kerala psyche in an interview with veteran journalist John Mary last week, building upon Thomas A Harris’s framework.

Prof Chatterjee also noted in an earlier interview that Kerala compares with Europe on several socioeconomic parameters. This is the paradox: a society that has achieved much and continues to build on those results still views its prospects through a distinctly pessimistic lens, especially in media discussions. In Kerala’s television debates, a question about what is wrong with the State is often met with this cynical counter-question: “what, indeed, is right with it?”

This reflexive pessimism has consequences, particularly for Kerala’s fiscal reputation. Any meaningful debate on public debt and development must therefore begin by separating legitimate criticism from indiscriminate gloom. Four issues merit closer examination, also in the interest of consensus taxonomy.

1. Public debt: View the number in perspective
The current context of discourse is set against the backdrop of the May 2026 White Paper on State finances and the October 2026 review report on KIIFB. Outstanding State debt is estimated at ₹5.05 lakh crore, around 35% of gross state domestic product. The White Paper warned of “a fiscal structure under serious and growing strain”. Earlier in 2019, an economist who headed a few State Commissions even predicted Kerala’s fiscal collapse by 2021.

Such concerns deserve scrutiny, but so does the way debt is presented. At least a few other States have similar levels of debt. But Kerala's debt angst is unique. Also, let us remember the Government of India has outstanding debt of Rs 197 lakh crore, which is about 57% of GDP. If we hark back to the FRBM Act-stipulated debt levels, the Centre’s target was 40%, against 20% for States. So the deviation is reflected in the debt levels of both the Centre and the States.

2. Public debt is not extinguished
Unlike households or corporations, governments have an indefinite lifespan. In the modern fiat-money system, no government faces an institutional requirement to extinguish its entire stock of debt by a predetermined date. Instead, maturing obligations are routinely refinanced through the issuance of new bonds, allowing the outstanding stock of public debt to be rolled over.

Paul Krugman has argued that national debt and domestic borrowing are fundamentally different from household or corporate debt because "we owe it to ourselves". A government borrowing in its own currency has great monetary flexibility. The issue of “solvency” does not arise at all if the debt is in the home currency.

Also, where nominal economic growth exceeds the effective interest rate on public debt, the debt-to-GDP ratio can also stabilise or decline without the government having to eliminate its outstanding debt stock. It may even increase if growth is higher than expected.

The critical distinction, therefore, is between repaying individual obligations and extinguishing the aggregate stock of government debt. Modern governments routinely do the former (through rollover/refinancing) without necessarily doing the latter. The relevant policy question is not whether the entire stock of debt will ever be repaid, but whether it can be serviced and refinanced sustainably while it is prudently deployed for growth and development.

3. The 3% target and how the Centre plays boss
The fiscal deficit benchmark of 3% of GDP under the fiscal responsibility framework (FRBM) is another source of contention. The Union government has now adopted a debt-to-GDP anchor, with a stated objective of bringing its debt ratio towards 50% by 2031. It may be noted that the 3% fiscal deficit target is through an Act of Parliament, and it is a moot question whether an annexure to the Budget papers can override the norms, in a legal sense.

States including Kerala, meanwhile, face borrowing constraints linked to Article 293 of the Constitution and the Union government’s consent for borrowing in specified circumstances. Kerala’s challenge to aspects of these restrictions raises a fundamental question of fiscal federalism: should States face rigid borrowing ceilings while the Centre retains greater room to alter its fiscal trajectory? Does this not indicate “asymmetric fiscal federalism” or even “fiscal double standards” between the Centre and the States?

Further, the Union’s sustained emphasis on capital expenditure, including allocations of a good 3% of GDP in recent budgets, illustrates the developmental possibilities of public investment. It also raises a legitimate question about whether States should also not receive comparable flexibility for productive infrastructure spending, subject to transparent safeguards.

This is particularly relevant to Kerala in the context of KIIFB. If its borrowings are counted towards Kerala’s overall debt constraints, the State has a case for seeking a credible adjustment/glide path that recognises the developmental purpose of such investment. This is not an argument to excuse extravagance, weak oversight, or procedural lapses in KIIFB. Please use an iron fist to deal with irregularities. No right-thinking person will have a quarrel.

4. Why 3%? Why not 5%? Or even 2%?
The 3% deficit benchmark is often treated as an inviolable economic truth. Yet its underlying rationale and continued suitability deserve rigorous scrutiny. Why 3%, rather than 2.5% or 4%? Institutions such as the Gulati Institute of Finance and Taxation and the Centre for Development Studies could examine whether a uniform ceiling adequately reflects differences in State economies, investment needs and debt sustainability. And is there any research-based validity for the number 3? Yes, the Maastricht Treaty also adopted the 3% norm for convergence. But will a relaxation of, say, 0.5 to 1% bring down the heavens?

When an elected State government seeks additional borrowing flexibility, the Centre should consider the request pragmatically rather than reject it reflexively. Any relaxation can be tied to evidence, conditional and accompanied by a credible glide path. Fiscal discipline and federal empathy need not be opposing objectives.

Kerala must confront its fiscal weaknesses honestly. Equally, its public discourse must distinguish financial risks from exaggerated narratives of inevitable collapse, doom, and patent negativism/pessimism. A sense of proportion, propriety and pragmatism would serve the State far better than relentless pessimism. Economic wellbeing, it is acknowledged even in the latest Nobel decision, is tied to “expectations”. That is not far away from hope, trust and optimism. It is high time the nature of discourse in Kerala at least stopped hurting this requirement.