Finance Minister K N Balagopal on Wednesday hinted at the possibility of Kerala recovering the ₹3,300 crore the centre had knocked off from its sanctioned borrowing limit of ₹29,529 crore for the first nine months of the 2025-26 fiscal. 

The Union Finance Ministry made the deduction citing Kerala's failure to create a Guarantee Redemption Fund, which was fixed as 5 per cent of the total guarantees Kerala has extended to innumerable government entities like KSEB, KSRTC and KFC. The Centre and states seem to have come to an understanding on how the 5 per cent can be set apart without burdening the states. 

Before an understanding was reached, the Centre had shaved off 0.25 per cent (₹3,300 crore) of Kerala's GSDP from its borrowing limit as a punitive measure. 

After the docking, the Kerala government has agreed to set up the Guarantee Redemption Fund. The state was originally against a reserve fund, saying that there was no history of the Kerala government having to bail out a company, except on rare occasions, like when the KTDFC (Kerala Transport Development Finance Corporation) went bust. "Setting apart 5 per cent of Kerala's outstanding guarantees as a reserve fund with the RBI would have squeezed the state's finances," Balagopal told reporters on Wednesday.

These guarantees are primarily solvency assurances offered to lenders of these government entities. It is just a promise that if at all something happens to the entity, the state will step in. 

The incomplete details provided by the Kerala government to the Comptroller and Auditor General show that Kerala's outstanding guarantees on April 30 stood at nearly ₹44,000 crore. The highest guarantee is for Kerala State Financial Enterprises (KSFE): ₹15,000 crore. Kerala State Cooperative Agricultural and Rural Development Bank has a government guarantee of ₹6,440 crore. 

Balagopal said the total guarantees would be over ₹80,000 crore. Five per cent of this as Guarantee Redemption Fund would be ₹4,000 crore annually.

Now, it looks like the Centre and the states have found a way out. Balagopal said that the Centre had told the states that they could set aside the 5 per cent of the outstanding guarantees not in one year but over a period of five years. "This year, therefore, we need to set aside ₹600 crore as reserve fund," Balagopal said, and added that Kerala is not "fundamentally opposed" to this measure.

Kerala has expressed its willingness to create the Guarantee Redemption Fund. However, the Centre has not yet promised the return of ₹3,300 crore it had punitively withdrawn from its borrowing limit. "We have to get back the money and we hope the centre will oblige soon," Balagopal said.

The finance minister said that the Centre had also slashed ₹900 crore from its borrowing limit for no fault of the state's. "The Centre says that there are losses in the IGST (Integrated Goods and Services Tax) pool. They now want the states to share the loss," Balagopal said. "We have always said that Kerala is not receiving its rightful from the IGST pool (where the GST share of the state is also kept when there is an interstate supply of goods). Now the Centre is punishing us for the wrongs committed by others," he said.

The sixth report of Kerala Public Expenditure Review Committee in 2024 had estimated the gross loss on account of IGST from July 1, 2017, when GST began, could be about ₹20,000 to ₹25,000 crore.