KOCHI: The Kerala government is banking heavily on higher tax collections to steady its finances over the next three years, projecting State’s Own Tax Revenue (SOTR) to grow by over 12% annually during the medium-term period.
The growth is expected to be driven by administrative reforms, tighter compliance and technology-driven enforcement under the GST regime.
The Medium Term Fiscal Policy and Strategy Statement for 2026–27 to 2028–29, tabled in the assembly, makes it clear that revenue-led consolidation will be the cornerstone of the state’s fiscal strategy, even as pressures mount from shrinking central transfers and rising committed expenditure.
Finance Minister K N Balagopal said the state’s economy was expected to maintain growth momentum, with Gross State Domestic Product (GSDP) estimated to expand by 14.15% in 2026–27.
“The priority is on enhancing growth-generating capital expenditure without compromising social welfare spending, while maintaining fiscal consolidation. Kerala is on the path of fiscal consolidation,” he said. He added that the state firmly believed consolidation should be achieved through revenue augmentation and expenditure efficiency, not expenditure cuts.
The policy document notes that the SOTR to GSDP ratio has remained stable around 6%, underscoring what the government describes as consistent revenue mobilisation. The share of state’s own revenue in total receipts has steadily improved, rising from 65.61% in 2022–23 to nearly 75% in 2024–25. State’s Own Tax Revenue alone now accounts for over 61% of total receipts.
At the same time, the government is factoring in higher central transfers. The share of central taxes is projected to rise by 53.8%, anticipating increased devolution following the 16th Finance Commission. Grants-in-aid are also estimated at a higher level than the revised estimate for 2025–26, mainly on expectations of a higher Revenue Deficit grant.
To sustain revenue growth, the government is relying on deep reforms in GST administration. Kerala has restructured its GST department into specialised wings for audit, taxpayer services and intelligence, and introduced faceless adjudication and AI-enabled return scrutiny. These measures, the statement says, have strengthened the detection of tax evasion while improving voluntary compliance.
Kerala was ranked first among States by the GST Council Secretariat in 2024–25. Non-tax revenue is projected to grow at a slower pace, with stabilisation of lottery receipts and improved recovery of user charges. Overall revenue receipts for 2026–27 are budgeted at Rs 1.83 lakh crore, up sharply from the revised estimate of Rs 1.37 lakh crore in 2025–26.
However, policy analyst Resmi P Bhaskaran cautioned that the finance minister’s expectation of a 55% hike in central share of revenue appeared unrealistic given current trends, especially with additional fiscal pressure arising from the shifting of employment guarantee scheme costs to the state. The revenue push assumes greater significance amid a steep fall in central transfers, which declined from 44% of total revenue receipts in 2020–21 to just 25% in 2024–25. The state has also flagged an annual revenue loss of around Rs 8,000 crore due to GST rate rationalisation, along with fresh risks from US reciprocal tariffs affecting export-oriented sectors.
Dr Madhavankutty G, Chief Economist at Canara Bank, said, “All revenue and tax assumptions are based on a nominal GDP growth rate of 14–15%, which also implies reliance on high inflation. While higher nominal GDP helps increase borrowing in absolute terms, the growth assumption looks very ambitious. Moreover, clarity on Finance Commission grants has not yet emerged.”
Forward estimates and underlying assumptions
GSDP- Nominal GSDP is projected to grow at 12% for both 2027-28 and 2028-29
Revenue Receipts- State Own Tax Revenue is estimated to grow at 12% in the forward estimate period. Non Tax Revenue is projected to grow at 9%
Central Transfers- Share of Central Taxes and Grant -in- aid are estimated to grow at 10% and 5% respectively in the forward estimate period