Kerala is known as a land of paradoxes. The state has among the highest human development indicators in India, yet these rarely translate into productivity and sustained growth.
Every Finance Minister knows it intimately: this is a state of rich people but a poor government. Today’s budget, presented by Chief Minister V.D. Satheesan, only the third sitting Chief Minister in Kerala’s history to hold the Finance portfolio, does not resolve this contradiction.No single budget could. But it points, with unusual candour and genuine strategic imagination, toward a path that might. The fiscal numbers are sobering.
The White Paper on Kerala’s Finances documents outstanding liabilities of Rs 5.07 lakh crore. A revenue shortfall of staggering proportion was discovered on day one: Rs 20,500 crore that the previous LDF budget had counted as central transfers has not been realised.
Committed expenditures on salaries, pensions, and interest now consume approximately 77 per cent of total revenue receipts, leaving barely anything for developmental or capital investment.
This fiscal distress is not new. Its roots reach back to the 1980s, woven into the making of the Kerala Model with high human development and export-oriented human capital formation requiring large committed expenditure. While the Union and other states were beneficiaries of the fiscal spillovers of that investment, the fiscal federal framework has had no room to compensate Kerala.
The imperative was always clear: the productive sectors of the economy had to become more vibrant. It never quite did. Between 1995 and 2010, Kerala’s GSDP growth averaged 7.01%, marginally ahead of the national 6.45%. In the subsequent fifteen years, buffeted by the 2018 and 2019 floods, COVID-19, and a remittance softening, it fell to 5.22% against the national 5.98%. Even in the post-COVID recovery, the state lagged. In 2024–25, Kerala grew at 6.19%, GDP growth at the national level was 6.5% while Tamil Nadu was as high as 11.5%. This is not a cyclical divergence. It is a structural rupture, and its fiscal consequences are now acute.
The Strategy: Growing Out of Fiscal StressGrowth cannot descend like manna from heaven. For growth, you need to invest. And investment, in a state with Kerala’s committed expenditure arithmetic, cannot come primarily from the government. This is the context in which today’s budget must be read — and, on balance, it reads better than the fiscal numbers alone would suggest.
The most significant strategic move is the explicit pivot toward crowding in private investment. The ‘Invest Kerala Cell’, a data-driven unit to clear the perennial obstacles of land acquisition and approvals, and an Investment Advisory Council signal a serious intent to change the state’s historically ambivalent relationship with private capital.
The Rs 100 crore allocation to launch 10,000 MSMEs acknowledges that the entrepreneurial energy of Kerala’s diaspora-informed workforce has been chronically under harnessed.
The Gen-Z startup fund of Rs 50 crore is in the same register: the return of young Keralites from abroad, combined with the state’s digitally fluent youth, represents a demographic dividend still waiting to be properly catalysed.
The ‘Knowledge Valley’ proposal, and a special legislation to attract foreign universities and amendments to the Private University Bill, is potentially the most consequential long-term investment in the budget.
Kerala has always invested in human capital. What it has rarely done is retain and monetise that capital domestically. If Knowledge Valley can attract institutions of genuine international standing, it could transform Kerala into a hub for high-value education, research commercialisation, and knowledge-economy services: precisely the sectors where the state’s human development advantages translate into competitive economic advantage.
The Rs 10 crore for an open Malayalam dataset and indigenous AI development is a small but symbolically important recognition that the state’s language can be a technology asset.
Mission Samudra opens a frontier that Kerala has long acknowledged but never systematically exploited. With over 590 kilometres of coastline, Vizhinjam deep-water port now becoming operational, and a large maritime labour force, the state has the makings of a serious blue economy.
The Aviation Logistics Hub, Global Convention Centre near Cochin International Airport, and Research Park all point toward infrastructure oriented toward high-value, knowledge-intensive, connectivity-dependent investment.
On KIIFB — the off-budget infrastructure financing vehicle that underpinned Kerala’s capital investment over the past decade — the budget’s approach is necessarily cautious.
The 16th Finance Commission’s mandate to bring KIIFB-type borrowings within the fiscal perimeter, combined with Article 293 restrictions, has constrained the vehicle doing much of the heavy lifting.
The transition to hybrid budget-KIIFB funding is the right sequencing; KIIFB was an institutional innovation born of the committed expenditure trap, not a substitute for fiscal reform. But dismantling its counter-cyclical capacity would be a serious error: it was precisely KIIFB’s ability to continue disbursing through the 2018–20 crisis, reaching its peak of Rs 8,459 crore in 2021–22, that prevented a collapse of the state’s capital programme.
The Unfinished Agenda: Revenue MobilisationWhat the budget does not yet do, and probably cannot do in a revised document presented two months into a new government’s tenure, is lay out a serious revenue mobilisation agenda.
Land and property taxes remain dramatically below assessed values. Tourism levies, luxury taxes, and environmental cess mechanisms are underutilised. If the growth agenda works, the fiscal dividend will need to be systematically captured. But it will take time. That is the task for next year’s full budget, when the honeymoon has given way to harder arithmetic.
The Bigger Picture: Federal Justice and the Growth Imperative
Kerala’s fiscal stress is not only a product of internal choices. The 3 per cent deficit ceiling, designed for sovereign governments with full revenue autonomy, leaves constitutionally non-sovereign states like Kerala with no viable path to investment within the formal budget.
The net gain from the 16th Finance Commission award over five years is approximately ₹2,357 crore, or ₹471 crore per year: a disappointment beyond expectation.
Alongside its domestic growth strategy, Kerala must articulate, in concert with similarly situated states, the case for a more equitable fiscal federalism.
The scenario arithmetic is direct. Kerala’s GSDP stood at approximately Rs 11.8 lakh crore in nominal terms in 2024–25. If the state could approach a Rs 30 lakh crore economy by 2030 — roughly doubling through a combination of real growth and inflation — the fiscal stress that appears structural today would become manageable through buoyant tax revenues alone. That is ambitious. It is not, for a state with Kerala’s human capital base, diaspora network, and strategic location, impossible.
VD Satheesan’s first budget is a revised document, presented under the shadow of a Rs 20,500 crore shortfall discovered on day one. Its ambitions are constrained by immediate fiscal arithmetic.
But its underlying strategic logic, that Kerala must grow its way out of fiscal stress, and that growth requires investment the government alone cannot provide, is correct. The real test comes in the full budget next year, when the harder choices about revenue mobilisation and committed expenditure management cannot be deferred.
Kerala has been living at the crossroads since the mid-1980s. Today’s budget does not resolve the structural tensions. But it looks, at last, in the right direction: toward the productive economy that must underpin, and ultimately rescue, the social achievements that Kerala’s citizens rightfully regard as their greatest collective inheritance.
Views are strictly personal
(The writer is Director, Gulati Institute of Finance and Taxation (GIFT), Thiruvananthapuram, and chairs the Seventh Kerala Public Expenditure Review Committee)