Development fuels LDF campaign in Kerala, NITI Aayog report says it's not true

The CPM is dangling the development card in the run-up to the assembly polls. NITI Aayog's latest report could tear it apart. Kerala has been placed in the “Aspirational” category in the Fiscal Health Index (FHI) 2026 released by NITI Aayog. The report, which reviews the financial health of states for 2023–24, ranks Kerala 15th among 18 major states, with a score of 24.8. One of the key reasons is the state’s high fixed spending on salaries, pensions and interest payments. Because a large share of the budget goes toward these commitments, the government has less money left for new development projects and investments.

In a nuanced attack on the NDA-led Central government, which is focusing on the development-oriented ‘Viksit Kerala’ mantra ahead of the Assembly polls, Kerala Finance Minister K N Balagopal had argued that the government had not reduced its development and welfare spending. In his Budget speech on January 29, he said development expenditure had been raised to the highest level in the state’s history. Citing KIIFB projects, the construction of National Highway 66 and the Vizhinjam port project, he said these were among the notable achievements of the Pinarayi government.

Overall, Kerala’s 15th place ranking puts it just above West Bengal, Andhra Pradesh and Punjab. The report groups these states under the “Aspirational” category, meaning they face higher non-development spending and weaker fiscal patterns compared with top-performing “Achiever” states. Odisha remains the top performer, improving its score over the previous year, with Goa and Jharkhand also featuring among the top Achiever states.

While Kerala has shown some strength in raising its own revenue, the report suggests the state needs to reduce rigid spending and invest more in development projects to improve its financial health in the coming years.

Too little spent on development
The report flags Kerala’s weak performance in the quality of expenditure category, where the state ranked last (18th) with a score of 4.1. In simple terms, this indicator looks at how wisely a government spends its money. States that allocate more funds to infrastructure, health, education and public projects score higher, while those spending more on salaries, pensions and interest payments score lower.

According to the report, Kerala’s capital spending is less than 2% of its Gross State Domestic Product (GSDP), while development-related spending accounts for less than 60% of the total budget. By contrast, top performer Odisha scored 71.2 in this category.

Over the past five years, the state’s capital expenditure ranged between 1.04% and 1.67% of GSDP. Utilisation of the capital expenditure budget varied between 49.22% and 83.40% from 2019–20 to 2023–24, reaching 74.57% in 2023–24.

The report also notes that capital spending declined in 2023–24 across several sectors, including economic services (2.51%), social services (2.79%) and general services (19.43%) compared with the previous year. Meanwhile, committed spending on salaries, pensions and interest payments accounted for 55% to 68% of revenue expenditure between 2019–20 and 2023–24, highlighting the limited flexibility in the state’s spending pattern.

Some strength in revenue collection
Kerala performed relatively better in revenue mobilisation, ranking 7th with a score of 47.8. Revenue mobilisation measures how well a state generates its own income, mainly through taxes and other internal sources, instead of relying heavily on borrowing or central transfers.

Although the score dropped slightly from 54.2 last year, it is still higher than the state’s 2014–17 average of 40.1. Kerala also performed better than states such as Gujarat and Karnataka in this area.

The state’s own tax revenue increased by 47.7% between 2019–20 and 2023–24, and accounted for 59.71% of total revenue receipts in 2023–24.

Among tax sources, State Goods and Services Tax (SGST) was the largest contributor, accounting for 41% to 42% of the state’s own tax revenue, followed by taxes on sales and trade, which contributed 37% to 39% during the same period.

Kerala’s non-tax revenue increased by 33.3% between 2019 and 2024, and by 8.12% in 2023–24 compared with the previous year. State lotteries remained the biggest contributor in this category, accounting for 66% to 81% of non-tax revenue between 2019–20 and 2023–24.

Moderate fiscal prudence
Kerala ranked 11th in fiscal prudence, an indicator of how well a state controls its budget deficit and borrowing. The state performed better than Tamil Nadu and Rajasthan in this category, though it lagged behind top performer Odisha.

Under the Kerala Fiscal Responsibility (Amendment) Act, 2022, the government had set a target of achieving a revenue surplus between 2019–20 and 2023–24. However, the state recorded a revenue deficit throughout this period.

The revenue deficit as a percentage of GSDP increased from 0.90% in 2022–23 to 1.58% in 2023–24, while the fiscal deficit rose to 2.99% of GSDP in 2023–24, up from 2.5% in 2022–23.

Debt remains a major challenge
The report also highlights Kerala’s high debt burden. In the debt index, which measures how much a state owes and how difficult it is to repay that debt, Kerala ranked 15th with a score of 23.3. The state’s total liabilities are more than 37% of its GSDP, while around 22% of its income goes toward interest payments alone. This leaves limited room in the budget for welfare schemes and development spending.

The report notes that the state’s total liabilities increased by 51.01% between 2019–20 and 2023–24.

Debt sustainability shows improvement
On the positive side, Kerala ranked 8th in debt sustainability with a score of 24.8. This indicator examines whether the state’s economic growth is strong enough to manage its debt over time. One measure used for this is the Domar gap, which compares the real interest rate on government debt with the real economic growth rate. If the economy grows faster than the interest burden, debt becomes easier to manage.

According to the report, the Domar gap turned negative during the Covid-19 period due to the sharp economic slowdown, but has improved since 2021 as growth has outpaced the effective interest rate, suggesting a gradual improvement in the sustainability of Kerala’s debt.