On January 12, with Palayam Martyrs' Square as the backdrop, Kerala Chief Minister Pinarayi Vijayan fulminated against the "embargo-like fiscal deprivation" the BJP-led Centre was inflicting on Kerala and implored people to unite against the "conspiracy to destroy and weaken Kerala".

This seeming impatience with the Centre could be an LDF ploy to prepare Kerala to misread the blood stains of fiscal mismanagement as evidence of martyrdom. 

A fortnight later on January 29, Finance Minister K N Balagopal will present the second Pinarayi Ministry's last budget and in all probability, the budget figures will reveal that Kerala's fiscal indicators have spiralled out of control.

Balagopal's dream vs reality
The 15th Finance Commission has stipulated that Kerala should achieve a revenue surplus of 2.50 per cent of the Gross Domestic State Product (GSDP) by 2024-25.

Balagopal, in his last budget dpeech, had attempted to keep the revenue deficit as low as possible and realistically estimated that, rather than a surplus, it would be a deficit of 1.90 per cent. 

Revenue deficit/surplus is the difference between revenue receipts (tax revenue + non-tax revenue + grants-in-aid) and revenue expenditure (on interest, salary, pension and subsidy). A deficit means the state spends more than what it earns. 

Going by the monthly fiscal trends put out by the Comptroller and Auditor General, it looks like Kerala's revenue deficit (RD) would balloon beyond the estimated 1.90 per cent, and might even be a near mirror image of the target fixed for Kerala by the 15th Finance Commission. Target - plus 2.50 per cent. Achievement - minus 2.50 per cent.

The RD had quickly swollen to 95 per cent (₹25,814.65 crore) of the budget estimate of ₹27,124.52 crore in December itself. There are three months more to go in the 2025-26 fiscal and the RD, if not 2.50 per cent, is certain to cross the 'danger mark' of 2 per cent of the GSDP. The RD was as low as 0.90 per cent in 2022-23.

The fiscal deficit (FD) Balagopal reveals on January 29 could also be hauled up for gross indiscipline. 

The 15th Finance Commission's FD target for 2024-25 is 3 per cent of the GSDP. Balagopal had estimated that it would be 3.16 per cent. 

Fiscal deficit is (revenue receipts like tax and non-tax revenue + recovery of loans and advances and other receipts) minus (revenue expenditure + capital expenditure + loans and advances). In other words, the FD is the difference between the total expenditure and total non-debt receipts of the State.

By the end of December 2025, the FD had grown 85 per cent (₹38,124.07 crore) of its estimated size of ₹45,038.52 crore. Forget Balagopal's target of 3.19 per cent, the 2025-26 FD could probably outgrow even the 2024-25 figure of 3.51 per cent.

Why deficits will be extra-large
The 2025-26 RD and FD could out-fatten Balagopal's budget estimates because the final quarter of the fiscal (January-February-March) is when the state's expenditure habitually soars. 'The eleventh-hour spending spree' is how bureaucrats term it.

This time, on top of the last-minute rush to meet spending targets by various government departments, there would be additional spending for which Balagopal had not made any space in his 2025-26 Budget.

On October 29, in what was widely seen as poll-eve generosity, the Chief Minister lavished on Kerala new welfare schemes and higher social security pensions. 

The hike in social security pensions from ₹1,600 to ₹2,000 for 62 lakh beneficiaries alone will necessitate an additional outgo of ₹4,000-4,500 crore annually; this would mean an unaccounted for expenditure of ₹700-900 crore in the last four months of this fiscal. 

The Sthree Suraksha Pension of ₹1,000 for 31.34 lakh women would cost ₹3,800 crore annually, of which ₹500 crore will be spent during the last four months of 2025-26. And the Connect-to-Work scholarships for over 5 lakh youths would take away ₹600 crore from the state's exchequer.

'Deficit Crush' game
In 2022-23, when revenue expenditure was getting uncontrollably obese, there was a fiscal equivalent of bariatric surgery that Balagopal performed to keep the deficits lean. 

He slashed social welfare spending in quite a dramatic fashion. If the 'social security and welfare' spending, under which falls social security pensions, was ₹12,960 crore in 2021-22, Balagopal pared it down to ₹7,973.69 crore in 2022-23.

Thus, in 2022-23, the RD, which threatened to cross the 2 per cent mark, was reined in at 1.58 per cent and the FD, which seemed eager to touch 3.50 per cent, was kept in check at 2.99 per cent of the GSDP. The side-effect was the non-payment of welfare pensions for five to six months.    

And the price the LDF had to pay to make the deficits look less intimidating was an embarrassing loss in the 2024 Lok Sabha polls. However, since 2025-26 is an election year, trimming social spending is not an option. The only way to make high deficits look less dreadful is to transfer the blame to the Centre.

Nonetheless, there is merit in the LDF government's charge that central transfers to Kerala in the form of tax devolution, revenue deficit grants and share of centrally sponsored schemes have dwindled. What was 5.52 per cent of the GSDP in 2020-21 has shrunk to 2.95 per cent in 2023-24.

Kerala's stress factors
Yet, there are larger issues that beset Kerala's economy. Dull growth in revenue receipts is one. Between 2022-23 and 2023-24, it grew by just 3.3 per cent. There was a period between 2010 and 2015 when the rate of growth of tax revenue averaged a healthy 12 per cent.

In 2024-25, Balagopal estimated that tax revenue would grow by over 14 per cent. His revised estimates say the growth is below 10 per cent. When the CAG releases the final account, experts say it could compress to 7-8 per cent. 

For 2025-26, Balagopal has estimated a more than 12 per cent growth. The achievement of such a growth looks highly unlikely as by December, Kerala has collected just 66 per cent (₹79,588.39 crore) of its tax revenue target of ₹91,514.75 crore. Last fiscal at the same time, Kerala had achieved 70 per cent of its target and still fell way short of its target at the end of the fiscal.  

Cost of inflexibility
There are other stress factors, too. Nearly 75 per cent of its revenue receipts are used to fund committed expenditure (salary, pension and interest), and this is one of the highest in the country.

Then, there are inflexible expenditures like statutory devolution to local bodies (this fiscal, it is ₹15,980 crore) and the transfer of motor vehicle tax and petrol cess to KIIFB (this was ₹ 3,230 crore in 2023-24). And nearly 12 per cent of inflexible expenditure is consumed by revenue receipts, which again is one of the highest in the country.

Together, committed and inflexible expenditures gobble up nearly 88 per cent of Kerala's revenue receipts. Result: Scarce to zero funds for priority sectors and capital creation.