With United Democratic Front (UDF) set to form the government in Kerala, the biggest challenge it will face is on shoring up the state’s battered finances. The alliance at 3.20pm had won or was leading in 100 seats and Left Democratic Front (LDF) in just 34 assembly segments. The ruling LDF is set to be unseated after 10 years in power. The Bharatiya Janata Party was leading in three seats.
But the Congress-led UDF has muddied the water even before it won the elections. It has offered five guarantees to voters: free bus travel for women, ₹1,000 a month for college going girls, increase in monthly welfare pension to ₹3,000, health insurance for up to ₹25 lakh a family, and an interest-free loan up to ₹5 lakh to small businesses and young entrepreneurs.
Experts estimate the fiscal impact of these sops at ₹25,000 crore. For a government already on a shaky fisc that's bad news.
To say Kerala government’s finances are in a mess is an understatement. The state has a long litany of woes which successive governments have failed to take head on. Its ability to raise revenue is impaired. Its borrowings are high and so is its interest burden. It is struggling to create jobs for its educated youth. An ageing population is fueling healthcare and pension costs. Remittances that account for 20% of the gross state domestic product (GSDP) are petering out. “The state’s financial position is pitiable,” K P Kannan, a development economist and former director at the Centre for Development Studies recently told Mint.
Rich people, poor government: Kerala is a state of rich people and poor government. People of the state consume a lot. “For example, households in Kerala with at least one car is 25% as per the recent household consumption surveys. Compare this with the national average of just 8%. The story is the same when it comes to consumer durables,” Kannan pointed out.
Between 2017-18 and 2023-24, the state’s own tax revenues grew by an average 6.5% per year, even as its GSDP grew by 8.5% annually. The state’s tax to GSDP ratio has declined from 9% in the 2016-21 period to 7.8% in the 2021-26 period, according to Kannan, citing Kerala budget numbers.
V D Satheesan, leader of the opposition in the Kerala Assembly and a leading candidate for chief ministership, blamed this on poor tax administration and massive leakages. “The state’s tax from gold was ₹500 crore when gold price was ₹4,000 for 8 grams. Now the price is over ₹1 lakh but tax collection is still ₹500 crore,” he pointed out.
Lower revenue, higher expenses: The inability to raise resources is compounded by the state’s high committed expenditure – payments for salaries, pension and interest. Nearly 70% of its revenue receipts go to funding the committed expenditure. This leaves very little money for productive expenses. The state’s capital expenditure is just 1.4% of its GSDP and is among the lowest in the country. The state is unable to invest for the future.
Debt trap: Lower revenues and higher expenses has forced the state to borrow heavily. Almost 50% of its borrowings go towards meeting its revenue expenditure. Not surprising that its revenue deficit is a high 2.5% of its GSDP in 2024-25. “The state has been in a debt trap for a long time,” Kannan said.
Jobs, Jobs, Jobs: By not investing for the future, the state has not been able to create enough jobs, especially for its educated youth. This is forcing them to leave the state. Rajeeve P, minister for law, industries and coir in the LDF government said adequate jobs have been created. “In the last five years we have brought in investments worth ₹3.3 trillion and close to 15 lakh jobs have been created,” he said. But lack of jobs was an important electoral issue.
India’s geriatric capital:
Kerala, India’s geriatric hotspot, is aging fast. As much as 17% of its population is above 60 years as against the national average of 7%. This has caused healthcare costs to rise. So has the pension bill especially considering that the state’s retirement age is a low 56 years. Combined with youth migrating out in search of jobs, the state stares at a demographic nightmare.
Shrinking life line: Remittances, as mentioned earlier, is the state’s life line and drives consumption. But over the years the nature of remittances is changing. Earlier, migrants predominantly went to West Asia. With little scope to settle down there, they sent their savings as remittances to India. Today’s migration is to countries such as the US, UK, Europe, and Australia which allow property purchase and the opportunity to settle down. Quantum of remittances as a share of GSDP has begun to decline.
Congress’ solution: Satheesan told Mint earlier that the state’s tax administration will be restructured. “Post-Goods and Services Tax (GST) most states restructured their tax administration but Kerala did not do it,” he said. Being a consumption economy, Kerala should be a biggest beneficiary of GST. He also called for better financial management and promised to prevent leakages. Stimulus to the economy to drive growth will in turn create more jobs.
(The story was updated to include the latest election result trends.)