India's policy think tank, NITI Aayog, has consistently ranked Kerala high on social indicators like health and education. But on fiscal performance, NITI Aayog has now ranked Kerala as one of the worst performers in the country, particularly because of poor development expenditure and unsustainable debts.

In NITI Aayog's latest report Fiscal Health Index (FHI) 2025, Kerala is ranked 15th among 18 non-special category states. Odisha, Chhattisgarh and Goa have bagged the top three ranks with FHI scores of 67.8, 55.2 and 53.6.

Kerala's score is 25.4. Below are West Bengal (21.8), Andhra Pradesh (20.9) and Punjab (10.7).

Along with the last three, Kerala is placed among the most poorly managed states under a category NITI Aayog generously calls 'Aspirational'. The other three categories are 'Achiever' (Odisha, Chhattisgarh, Goa, Jharkhand and Gujarat), 'Front Runner' (Maharashtra, Uttar Pradesh, Telangana, Madhya Pradesh and Karnataka) and 'Performer' (Tamil Nadu, Rajasthan, Bihar and Haryana).

The composite FHI has been developed using the 2022-23 data from the Comptroller and Auditor General (CAG), and focuses on five areas: Quality of Expenditure, Revenue Mobilisation, Fiscal Prudence, Debt Index, and Debt Sustainability.

Quality of Expenditure
It is in the 'Quality of Expenditure (QoE)' that Kerala has performed the worst. The state is ranked last, 18th.

QoE is measured on the basis of two indices: One, the ratio of total development expenditure (government spending on long-term economic growth like investment in transport infrastructure, and schools and hospitals) in the total expenditure; and two, the ratio of the total capital outlay to the GSDP (this demonstrates how much of the state’s economic resources are being directed towards capital projects, such as infrastructure, facilities, and other long-term investments like education and health)

The report notes that development expenditure has long been overshadowed by the state’s high Committed Expenditure (spending on salaries, pension and interest payments). "Committed Expenditure constituted 56-68% of revenue expenditure during the period 2018-19 (61.9%) to 2022- 23 (63.9%)," it says. Latest CAG figures show, it has worsened to 65.10% in 2023-24.

Further, the FHI report says that in 2022-23, Capital Expenditure was 8.8% of total expenditure, lower than the 15.2% average of comparable states.

Revenue Mobilisation
This is the only index where Kerala has done well, and vindicates finance minister K N Balagopal's constant refrain that tax collection has picked up dramatically during the second Pinarayi ministry.

Kerala is ranked 6th, and falls under the 'Front Runner' category, the second best of the four categories mentioned in the FHI report.

"During 2022-23, Own-Revenues of the State recorded a growth rate of 26.5% as compared to the previous year and a CAGR (compounded annual growth rate) of 7.3% in last 5 years. Own Tax Revenues increased by 23.3% and constituted 54.2% of the revenue receipts," the FHI study says.

The state’s Own Non-Tax Revenue, too, reflected a substantial growth rate of 44.5% over the previous year and CAGR of 5% in last 5 years. State lotteries are Kerala's primary source of non-tax revenue.

Kerala's own revenue of 7% of the GSDP is higher than the national average of 6.6%.

RBI's 'Study of State Budgets 2025' has also said that Kerala was prioritising resource mobilisation for economic recovery and development with reforms focused on tax revision and modernisation of the GST department.

Nonetheless, the latest CAG figures indicate a relapse. In 2022-23, the fiscal the NITI Aayog based its FHI calculations on, the state's own tax revenue as a percentage of the GSDP was 7.03%, the highest in the last five fiscals. However, in 2023-24, it slipped to 6.48%.

Fiscal Prudence
Here, Kerala is ranked 11th, and placed under the third or second last category: 'Performer'. The revenue deficit decreased from 3.3% in 2021-22 to 0.9% in 2022-23. The fiscal deficit also showed a downward trend, largely attributed to a decrease in revenue deficit. The fiscal deficit as a proportion of GSDP decreased from 5% in 2021-22 to 2.5% in 2022-23.

Here, too, like in the case of revenue mobilisation, Kerala has witnessed a backslide. In 2023-24, the revenue deficit rose to 1.58% from sub 1% and the fiscal deficit enlarged to 2.99% from 2.5%.

But this, as finance minister Balagopal repeatedly says, is on account of the fall in grants-in-aid from the Centre. Grants-in-aid refers to centre's support in the form of grants for centrally-sponsored schemes approved by NITI Aayog, grants recommended by the Finance Commission and other grants.

This has seen a significant reduction from 2022-23, the fiscal on which the FHI is based. From Rs 27,377.86 crore in 2022-23, it dropped to 12068.26 crore in 2023-24.

Debt index and sustainability
Here, the performance is among the worst in the country. Kerala is ranked 16th, and along with Haryana, West Bengal and Punjab is grouped in the last category: 'Aspirational'.

The rank is derived from Kerala's performance in two indicators. One, the ratio of interest payments to Revenue Receipts (IP/RR). Two, the ratio of outstanding liabilities to GSDP, and this indicates how much of the Gross State Domestic Product (GSDP) is taken up by debt stock.

"The per cent of Total Liabilities to GSDP has increased from 30.7% in 2018-19 to 37.6% in 2022-23," the study notes. In 2023-24, it has come down to 36.23%. This, however, is higher than the national average of 29.8%.

Further, it says that interest payments consumed 20% of revenue receipts during 2021-22, and 19% in 2022-23. The ratio of interest payments in revenue receipts remains the same for 2023-24 (19.15). This, too, is higher than the national average of 13.5%.