KOCHI: While Kerala’s high debt levels often draw criticism, a new study by the Gulati Institute of Finance and Taxation (GIFT) says that the state’s debt trajectory is not a story of collapse, but one of recovery.
According to the report, fresh data from the Comptroller and Auditor General (CAG) paints a more nuanced picture: Kerala’s economy is stabilising faster than many other states. The pandemic shock temporarily inflated debt figures, but with economic revival and disciplined borrowing, sustainability is achievable without compromising welfare spending.
P S Renjith, an assistant professor at GIFT, pointed out that the Reserve Bank’s 2022 report had categorised Kerala among the most fiscally unsustainable states. “Before the pandemic, Kerala’s debt-to-gross state domestic product (GSDP) ratio hovered between 27% and 32% for nearly two decades, a range widely considered sustainable. In 2018-19, the ratio stood at 30.65%. The Covid crisis disrupted this balance. In 2020-21, Kerala’s GSDP shrank by nearly 9%, a contraction that was sharper than the national average. This denominator effect pushed the debt-GSDP ratio up to 39.96%. The RBI read this as a sign of fiscal mismanagement, projecting Kerala’s debt ratio would remain above 35% well into 2026-27,” he said.
But the post-pandemic years have proved otherwise. By 2023-24, Kerala’s debt ratio dropped to 34.2%, with the latest budget estimate placing it at 33.8% for 2025-26. This marks a steady downtrend, even after factoring in off-budget borrowing, which now invites increased scrutiny by the CAG.
Comparative data strengthens Kerala’s case. While Punjab (44.5%), Himachal Pradesh (40.5%), and West Bengal (38%) continue to carry heavier debt loads, Kerala has achieved a sharper and more consistent reduction. In fact, it now ranks among the top ten states in terms of the pace of decline.
“The gap between pre-pandemic debt/GSDP ratio and current levels has narrowed to just 3.15 percentage points, placing Kerala 16th in terms of adjustment volume. These trends confirm earlier GIFT projections that Kerala could reach a sustainable threshold of 27.8% by 2030-31, provided economic growth continues and fiscal discipline is maintained,” Renjith said.
“What was once flagged as a ‘debt crisis in waiting’ is now shaping into a story of cautious recovery. If Kerala continues on this trajectory, it could provide a model for other states, demonstrating that fiscal consolidation and social commitment can coexist, even in a post-crisis economy,” he added.
The study points out that two factors could weigh on this trajectory: central restrictions that limit additional revenue mobilization and the growing challenge of an ageing population.
M Suresh Babu, director of the Madras Institute of Development Studies (MIDS), said that according to the CAG report, Kerala is not in a significantly dangerous position regarding debt.
“The report shows that, despite facing revenue deficits, Kerala is making progress in addressing these challenges,” he told TNIE.
“Borrowing itself isn’t the problem — what matters is how states use the money and whether they can repay it. From a national perspective, India’s states are sitting on a mountain of debt that has tripled in a decade, according to the CAG report. If states also have weak revenue-generation capacity, it becomes difficult to service debt without relying on Union government transfers or further borrowing. As debt servicing — interest and principal repayments — grows, fiscal space for capital expenditure essential for infrastructure, health, education, and even climate adaptation shrinks,” Suresh added.