The Kerala State Budget 2025-26 aims to support the smooth continuation of initiatives launched by the state government in previous years. The government plans to achieve an accelerated growth rate by adopting a pro-cyclical approach, aligning policies with the overall economic cycle.
Many of the budget's projects build on existing policies, focusing on the knowledge economy and introducing new technology and digital infrastructure initiatives. The budget also expands the government's size and plan outlay, reflecting a 7% increase. Notably, it avoids raising taxes, protecting citizens from reduced consumption.
Kerala’s economy has two key strengths: urbanisation and in-migration. However, challenges such as an aging population and declining birth rates remain. To address these, a strategy is needed to turn challenges into opportunities. For example, the 'New Innings' project encourages senior citizens to remain socially active and economically engaged. The budget prioritises the knowledge economy, with the creation of seven new Centers of Excellence, new fellowships and scholarships, and the continuation of existing scholarship programs.
Kerala is also positioning itself as an early adopter of artificial intelligence (AI), launching initiatives ahead of the Union Government. The establishment of a GPU cluster will make Kerala a hub for AI and the AVGC (Animation, Visual Effects, Gaming, and Comics) sectors, attracting investments and creating job opportunities for youth.
This early-mover advantage is made possible by Kerala's comparative advantage, with the budget taking an 'eco-spatial planning' approach instead of focusing on a single region. Initiatives such as the Vizhinjam-Kollam-Punalur Growth Triangle and the Thiruvananthapuram-Kollam Industrial Corridor exemplify this strategy.
Significant attention is also being given to urban development in major cities like Thiruvananthapuram, Kochi, and Kozhikode. The government aims to capitalize on investments, as seen in projects like the Thiruvananthapuram-Kollam Industrial Corridor, with a strong emphasis on the Vizhinjam Seaport.
There is also a push to decentralise IT infrastructure beyond major metropolitan areas, extending to cities like Kollam and Kannur. Revenue generation strategies, such as land taxes, are in place, while fiscal prudence is maintained through strict expenditure controls.
Kerala is currently undergoing its ‘second turnaround,’ similar to the first in the early 1980s, which was driven by Gulf migration. This new phase of economic growth is fueled by public investment in infrastructure, the expansion of MSMEs, and a dedicated labor force.
The state’s development strategy mirrors South Korea’s economic growth model, with a focus on strategic investments and workforce commitment. The Kerala State Budget 2025-26 reflects a forward-thinking approach, leveraging strengths and addressing challenges to sustain long-term growth.
(Dr Ravi Raman is a Member, State Planning Board, and a former senior fellow at the Nehru Memorial Museum and Library, New Delhi. He was also Director, Institute of Applied Manpower Research, at the Planning Commission, and a visiting fellow at the Oxford, Cambridge and Manchester Universities for varying periods.)