KOCHI: As a double-edged sword in policy making, subsidies are a convenient political tool and a damaging fiscal policy. Across India, states routinely spend vast sums on free electricity, farm-loan waivers and consumption support to ease the cost of living.
Yet Kerala, often labelled a welfare-heavy state, quietly runs one of the leanest subsidy regimes in the country — particularly in electricity — even as it struggles to keep a tight leash on its finances. Finance Commission assessments and state budget documents show that Kerala’s explicit subsidies, measured as a share of gross state domestic product (GSDP), are markedly lower than those of many large states. The contrast is most visible in the power sector, where Kerala’s subsidy burden is among the lowest in the country.
Unlike Punjab, Tamil Nadu, Andhra Pradesh, or Rajasthan — where free or heavily subsidised electricity for agriculture and households forms a major component of public spending — Kerala follows a restrained model. KSEB does not provide blanket free power. Instead, assistance is limited to lifeline tariffs for low-consumption households and a few welfare categories.
G Madhavankutty, chief economist at Canara Bank, estimates Kerala’s power subsidy at roughly “0.2–0.5% of GSDP”, far below states offering universal free supply.
Lekha Chakraborty, professor at the National Institute of Public Finance and Policy, says the 16th Finance Commission’s analysis also places Kerala among the lowest in per-capita electricity subsidy — about Rs 155 on average in recent years, with an absolute subsidy of roughly Rs 842 crore in 2023-24 for a population of around 3.5 crore.
Kerala’s per-capita subsidy is only a fraction of that in several states
Lekha attributes this to three structural factors: relatively efficient KSEB operations with lower distribution losses, the absence of universal free power schemes, and tightly targeted support.
“No households receive blanket free electricity across expenditure groups, and support is largely restricted to specific categories such as SC/ST families and very low-consumption users below 25 units,” she told TNIE. By contrast, several states extend free power to a large share of even higher-income households, sharply inflating costs.
The result is a sharply lower subsidy bill. Kerala’s per-capita subsidy is only a fraction of that in many states.
According to Madhavankutty, higher incomes and urbanisation also play a role. “The income divide is narrower than in many parts of India, reducing the pressure for broad subsidies,” he noted.
The pattern extends beyond electricity. Kerala’s welfare model relies less on price subsidies and more on institution-based delivery.
“Food support, for instance, combines near-universal public distribution system (PDS) coverage — about 94.9 lakh families — with relatively low explicit subsidy spending of around Rs 414 per person in 2024-25, compared with several thousand rupees in some other southern states. Aadhaar-linked identification and decentralised local governance have improved targeting and reduced leakages,” Lekha explained.
“At the same time, the state spends heavily on direct welfare. Social security pensions of Rs 2,000 a month — among the highest in India — reach roughly 62 lakh beneficiaries and consume nearly 17% of revenue expenditure. Housing through the LIFE Mission and other targeted schemes similarly emphasise income support rather than consumption subsidies,” she added.
An analysis prepared by the Centre for Development Studies for the Finance Commission notes that since 2014-15, Kerala’s explicit subsidies have consistently “remained below 2% of total revenue expenditure”, except during the Covid years of 2020-21 and 2021-22, “when they rose to 5.30% and 2.84%, respectively”. The commission has cautioned that broad subsidies can crowd out capital spending and weaken long-term growth. For Kerala — which already spends less on infrastructure than many peers — that risk is significant.
At the same time, a study on subsidies and transfers in India by the Asian Development Bank, submitted to the commission, argues that well-designed subsidy programmes can promote social welfare, reduce poverty, and “generate positive externalities”. However, poorly targeted or universal subsidies often become regressive, with a significant share of benefits flowing to higher-income groups,”thereby widening inequality”.
Walking A Fine Line
Government subsidies may be defined as the difference between the cost of delivering various publicly provided goods or services (henceforth, services) and the recoveries arising from such deliveries.
Total subsidies & transfers – Explicit budgetary subsidies (power, agriculture, food, transport, etc.) + Unconditional cash transfers (social security pensions, income support schemes) + Other revenue-account subsidies