KOCHI: Riding in on a sweeping mandate, the new UDF government now faces a tough task — funding its big-ticket promises. Experts warn Kerala’s tight fiscal space could severely test both political resolve and policy choices.
The package is ambitious: Rs 25 lakh health cover per family, free bus travel for women, Rs 1,000 monthly for female college students and pensions raised to Rs 3,000 — a strong social push, but one that raises hard questions on affordability.
Former IRS officer R Mohan describes the commitments as “a little taxing”, politically and fiscally. He estimates that the combined burden of the proposed pay revision, expanded welfare schemes and existing pension commitments could “easily cross Rs 1 lakh crore.” “The new pay commission can add a minimum of Rs 40,000 crore in salary and pension expenditure, including payment of delayed arrears of DA,” he said.
The revenue side offers little comfort. “The post-GST scenario for some of the states isn’t good, and Kerala is one state with a persistent revenue deficit,” Mohan noted.
GST growth of about 10% per annum would fetch only Rs 15,000–18,000 crore more in five years, he pointed out.
Prof M Suresh Babu, director of Madras Institute of Development Studies, characterises Kerala’s situation as a “structural fiscal squeeze” . Kerala continues to run a revenue deficit of 1.5–2% of GSDP, meaning its routine expenditure outpaces income. This compels borrowing even for day-to-day spending. Interest payments are consuming an increasing share of revenues, further tightening fiscal space.
“Kerala faces a compression of fiscal space, where even moderate increases in revenue are insufficient to offset pre-committed obligations,” Babu said. Lekha Chakraborty of the National Institute of Public Finance and Policy said the fiscal space for large-scale cash transfer programmes is limited. Expanding untargeted transfers could push up borrowing costs and crowd out productive investment.
“Federal fiscal dynamics will continue to shape the state’s options. Concerns around Centre-state financial relations — particularly tax devolution, predictability of grants, and borrowing constraints — remain salient,” she said. “The first full budget will provide a clearer signal of the government’s strategy,” she added.
Mohan, however, said there there is no point in dismissing the promises. “Many states have done it. There could be options like moving to funded pensions and greater privatisation. In Kerala, these may face a level of resistance not likely in other states,” he said.
“Will there be enough political will to go in for these? Organised pressure groups are also likely to come up with new demands. How the delicate balancing between what is fiscally possible and politically desirable is carried out is the big question. There are no easy answers,” he added.