Thiruvananthapuram: The white paper on Kerala's finances has identified a less-discussed but critical challenge confronting the state: a steady weakening of its revenue-generating capacity relative to the size of its economy.

The report presents a detailed comparison between Kerala and 18 major Indian states and concludes that while most states have strengthened their revenue performance over the past decade, Kerala has experienced a structural erosion of its tax base. The trend, the report warns, has left the state increasingly dependent on borrowings and vulnerable to the withdrawal of central support mechanisms such as GST compensation and Revenue Deficit Grants.

Revenue receipts fall behind other states
One of the clearest indicators of Kerala's weakening fiscal position is the decline in revenue receipts as a share of Gross State Domestic Product (GSDP), a measure of the total value of goods and services produced within the state.

In 2015-16, Kerala's revenue receipts amounted to 12.28 per cent of GSDP. By 2025-26, that figure had fallen to 10.68 per cent. The experience of other states has been markedly different. The average revenue receipts of 18 major states rose marginally from 13.46 per cent of GSDP in 2015-16 to 13.90 per cent in 2025-26.

As a result, Kerala's gap with its peers widened sharply from 1.2 percentage points a decade ago to 3.22 percentage points in 2025-26.

Own revenue performance reverses
The report also notes a significant reversal in Kerala's own revenue performance. "Own revenue" refers to income generated directly by the state through taxes, fees and other sources, excluding central transfers and grants. It includes all of SOTR, plus State's Own Non-Tax Revenue.

In 2015-16, Kerala's own revenue stood at 8.44 per cent of GSDP, higher than the major states' average of 7.48 per cent. By 2025-26, Kerala's ratio had declined to 7.75 per cent, while the average for major states had increased to 8.19 per cent. The figures indicate that Kerala has moved from being a stronger-than-average revenue mobiliser to lagging behind comparable states.

The state's own tax revenue has also deteriorated. State's Own Tax Revenue (SOTR) includes taxes collected directly by the state government, such as GST, excise duty, motor vehicle tax and stamp duty.

In 2015-16, Kerala collected taxes equivalent to 6.94 per cent of GSDP, comfortably above the major states' average of 6.35 per cent. A decade later, the situation has reversed. By 2025-26, Kerala's SOTR had fallen to 6.41 per cent of GSDP, while the average for major states had increased to 7 per cent.

Between 2023-24 and 2025-26, Kerala recorded the slowest growth in State's Own Tax Revenue among nine major states including Tamil Nadu, Karnataka, Telangana, Andhra Pradesh, Maharashtra, West Bengal, Punjab and Haryana.

Kerala's annual SOTR growth stood at just 8.4 per cent, compared with the major states' average of 13.1 per cent. Its SGST collections grew by only 8.63 per cent during the period, while the major states' average growth rate was 15.93 per cent. According to the report, every state in the comparator group recorded faster SGST growth than Kerala.

Kerala's GST paradox
Perhaps the most striking finding relates to the Goods and Services Tax (GST). GST is a destination-based tax, meaning revenue accrues largely to the state where goods and services are consumed rather than where they are produced.

Because Kerala is a consumption-driven economy with high household spending, policymakers had expected the state to emerge as a major beneficiary of the GST regime introduced in 2017. However, the white paper finds that Kerala has consistently underperformed.

At the start of the GST regime in 2017-18, Kerala's State GST (SGST) collections stood at 1.95 per cent of GSDP, compared with a major states' average of 2.07 per cent. By 2025-26, Kerala's SGST collections had risen to 2.65 per cent of GSDP. But other states recorded much faster growth, pushing the average to 3.09 per cent.

As a result, Kerala's SGST gap widened from 0.21 percentage points to 0.45 percentage points over the period. The report describes this as a significant concern because Kerala was expected to gain more from the GST system than most other states.

Why growth is not translating into revenue
The report attributes part of the problem to weak revenue buoyancy. Revenue buoyancy measures how quickly tax collections grow when the economy expands. A coefficient above one indicates that revenue grows faster than the economy, while a figure below one suggests revenue is growing more slowly than economic output.

For the period between 2015-16 and 2025-26, Kerala's SOTR buoyancy coefficient was 0.96. The average for major states stood at 1.09.

The significance of this finding is considerable. Since Kerala's coefficient is below one, the state's tax base is effectively shrinking relative to the size of its economy. In simple terms, every percentage point of economic growth generates proportionately less tax revenue than it does in most other states. The white paper warns that Kerala cannot rely on economic growth alone to improve its fiscal position unless it expands its production and services tax base.

Kerala's performance in property and capital transaction taxes has also been relatively weak.

These taxes, which include stamp duty and registration fees, contributed 0.57 per cent of GSDP in 2015-16. By 2025-26, the figure had increased only marginally to 0.59 per cent.

In contrast, the average for major states rose from 0.79 per cent to 0.95 per cent during the same period.

The remittance disconnect
Remittances from expatriate workers account for roughly 23.2 per cent of Kerala's Net State Domestic Product and support substantial levels of consumer spending. However, much of the goods purchased by Kerala households are manufactured outside the state.

Under the GST framework, Kerala receives the final consumption tax. But the broader economic benefits associated with manufacturing, including employment generation, value addition and production-linked tax revenues, accrue largely to the producing states.

As a result, Kerala captures only a fraction of the economic gains generated by the spending power created through remittances.

The white paper concludes that Kerala's revenue base has become structurally inelastic at a time when peer states have successfully leveraged GST reforms and the post-pandemic recovery to strengthen their finances.

The state's revenue-to-GSDP ratios have declined across multiple indicators, tax collections have grown more slowly than in comparable states, and economic growth is not translating into proportional revenue gains.

With GST compensation payments and post-devolution Revenue Deficit Grants from the Centre now discontinued, the report warns that Kerala's weakened revenue performance leaves it increasingly dependent on borrowing to finance expenditure. In the committee's assessment, reversing this trend will be essential if the state is to restore fiscal stability and reduce its growing reliance on debt.