Fiscal Realities: Kerala’s 2025-26 Budget in Perspective

Issue 78

Kerala’s financial crisis has been a concern for long. In this article, Ayana Krishna D, Sangeetha Kethapaka and Shraddha Jain dive into the nitty-gritties of the 2025-26 Kerala budget explaining why it might not lead the state towards sustainable economic growth. 

Ayana Krishna D, Sangeetha Kethapaka, Shraddha Jain

Kerala has always been celebrated for its performance on human development indicators. But the state has always struggled in generating employment and capital. This year’s budget presented by the Finance Minister K.N. Balagopal on 7 February 2025 shows how the state has now shifted its focus to long-term investments in a bid to secure better economic growth. 

While the budget rightly identifies critical challenges such as rapid urbanisation, climate change, migration, demographic shifts, growing polarisation, increasing marginalisation, and inequality, it seems to prioritise large visible infrastructure projects over these challenges. Investing in high-visibility infrastructure projects can serve as political capital but it can leave long-term socio-economic challenges unaddressed. Moreover, the focus on mega projects also raises questions around responsible fiscal planning. 

Cover of the Budget Document, 2025-26. Source: Government of Kerala

Given Kerala’s fiscal constraints, budget prioritisation on big-ticket infrastructure can inevitably lead to the sidelining of the most marginalised or vulnerable sections of people. In this article, we analyse  Kerala’s budget for 2025-26, by (i) contextualising it in the state’s present fiscal scenario, (ii) raising concerns on the priorities showcased in the budget, and (iii) identifying critical welfare areas which the budget failed to address.

Kerala’s Fiscal Scenario

Kerala has been facing a financial crisis for decades, with the situation worsening over time. It has been argued that persistent high spending on social welfare services, particularly in education and healthcare (higher than in other Indian states), along with the rising costs of salaries, pensions, loans, and interest payments, has strained the state’s finances (George, K.K., 1990). Simultaneously, slow revenue growth and inadequate resources to meet the budget allocations have contributed to high fiscal deficit (FD) and an unstable fiscal situation (Prakash & Alwin, 2018). To understand the fiscal challenges or the well-being of the state better, it is important to examine the status of fiscal deficit, debt sustainability and revenue mobilisation. These together evaluate the strengths or weaknesses of the state’s fiscal situation.

Fiscal Deficit: FD, broadly, is the situation where the total expenditure exceeds the total revenue (excluding borrowings) of the economy for a given period. FD measures the portion of government expenditure which is financed by borrowings and throws light on the extent to which the government exceeds its current means (Gupta & Singh, 2016). The current budget for the 2025-26 financial year shows an FD of Rs. 45,038.52 crores (estimated total expenditure is Rs. 1,98,582.40 crores, while total revenue is expected to be Rs. 1,53,543.88 crores), which is higher than the 2024-25 budget estimate (Rs. 44,528.96 crores). According to the revised estimates for 2024-25, there is a higher deficit than originally planned, indicating a worsening financial situation.  It is evident from the budget that the FD is increasing rapidly since there is a 76% jump from 2022-23 to 2025-26. Even though the budget showed the decline of the FD as a percentage of GSDP (Gross State Domestic Product) from 3.40% in 2024-25 to 3.16% in 2025-26, it is still above the FRBM limit of 3%.1 

Debt Sustainability: As explained above, the FD in Kerala is very high, and it is financed by borrowings. Between 2022-23 and 2025-26, public debt rose by 126.6%, from Rs. 18,026.42 crores in 2022-23 to Rs. 40,848.21 crores in the 2025-26 budget estimate (B.E). At the same time, interest payments accounted for 16.02% of the total expenditure for 2025-26, adding to the state’s financial burden. Since the state’s GSDP growth rate (8.82%) is lower than the growth rate of interest payments (10.9%), comparing 2025-26 (B.E) with 2024-25 (B.E), debt sustainability continues to be a concern. If the situation continues in an unsustainable manner,  there could also be a downgrade in the state’s financial outlook. A downgraded financial outlook would make government borrowing more expensive, worsening the fiscal situation for the state. Furthermore, the government may then have less financial scope for investing in public services and in the long term, that could slow down the growth and impact the human development indicators, which Kerala has historically excelled in.

Revenue Mobilisation: Whether Kerala will be able to generate enough revenue from its tax revenue, non-tax and other sources, to compensate for the expenditures and borrowings, is another real concern. The budget 2025-26 anticipates a reduction in the revenue deficit (excess of revenue expenditure over revenue receipts). This hope may be attributed to the estimated additional revenue which is expected to be generated through increased state tax collections. Tax revisions include: a 50% hike in land revenue tax, a 50% increase in road tax for private vehicles older than 15 years, and a new 8% tax on private electric vehicles (EVs) priced above Rs. 15 lakhs. However, it is uncertain whether these measures will be sufficient enough to generate significant additional revenue because of the following reasons. First, the increased tax on EVs goes against the goal of promoting sustainable alternatives Second, since effective capital expenditure is set to rise significantly, showing an 18.25% increase in 2025-26 compared to the revised estimates of 2024-25, infrastructure development projects essential for long-term economic growth may not provide immediate revenue relief. Finally,  the increase in land revenue tax and road tax may increase the financial burden on citizens. It can also make the real estate transactions costlier and discourage ownership of vehicles and allied small businesses. The state may have to then focus on better ways to enhance revenue mobilisation and rationalise its expenditures for a better fiscal situation.

Cuts in the Divisible Pool: In addition to the state grappling with a long-standing financial crisis, the reduction of the state’s share of tax revenue from the central government over the last 25 years is a significant concern. During the 2025-26 budget speech, Finance Minister K.N. Balagopal pointed out how Kerala’s allocation has dropped from 3.88% under the 10th Finance Commission2 (1995-2000)  to just 1.92% under the 15th Finance Commission (2020-2025).

If the decline in the state’s revenue share persists, it will aggravate the fiscal crisis, and the state might have to compromise on budget allocation to the social sector and would have to mobilise revenue from the high taxes, as is evident in the current budget 2025-26. This will also lead to heavy dependence on central grants, other borrowings and strain the state’s finances further. Additionally, the recent Fiscal Health Index 20253 (which evaluates the financial stability of Indian states) considers all these fiscal issues such as fiscal debt, revenue mobilisation, debt sustainability etc. and evaluates states’ fiscal performance. It ranked Kerala 15th out of 18 states as of 2023. It is also evident that the states with better financial stability, such as Maharashtra, Gujarat, Uttar Pradesh, Karnataka, and Telangana, have been attracting more Foreign Direct Investments (FDIs) in India. Kerala’s fiscal instability can be one of the significant factors that may make it less competitive compared to these states in attracting investments. 

All these issues explain the gravity of the state’s fiscal situation and this reflects on the current budget 2025-26 allocations where there are various budget cuts and gaps. It also draws attention to the optimum allocations and the prioritisation strategies of the government. 

Budget priorities: Concerning Trend?

The budget reflects a pattern of prioritisation that raises critical questions about sustainability, inclusivity, and long-term planning. This section examines key areas where the state’s approach may require a fundamental rethinking.

  • Rapid Urbanisation: A Misplaced Focus on Metro Projects?: The budget’s approach to tackling rapid urbanisation appears overly reliant on metro rail projects, raising concerns about their feasibility and cost-effectiveness. For a metro rail system to operate efficiently and attract sufficient commuters to justify its high investment, it requires an extensive network of feeder public transport services, intermediate transport options, and adequate car parking facilities. Without these supporting systems and ensuring last-mile connectivity, the metro may struggle to reach its full potential in terms of ridership and impact. Moreover, urban development cannot be limited to transportation alone. It must also ensure essential services like water supply, sewage disposal, pedestrian-friendly infrastructure, public health, education, and recreational spaces. A more holistic urban strategy is needed to create liveable and well-equipped cities rather than focusing narrowly on high-cost transit projects. 
  • Ecological Vulnerability and Infrastructure Priorities: The 2025 report released by the Institute for Climate Change Studies, Government of Kerala, warns that Kerala is fast becoming the “heat capital of India.” With recent disasters like the Wayanad landslide, there has been a renewed focus on discussions around sustainable interventions, resource planning, and land use. Given this context, the budget’s emphasis on large infrastructure projects raises serious concerns about its ecological viability. For instance, the budget has allocated around Rs. 2,134 crores for the Kozhikode-Wayanad tunnel road project (or Anakkampoyil-Kalladi-Meppadi tunnel road), despite concerns raised about its environmental impact. Are such big-scale infrastructure projects accounting for their environmental costs, especially amid worsening climate-related challenges? While climate change and environmental issues are acknowledged in the budget, concrete measures to address localised, seasonal vulnerabilities remain unclear. For instance, communities in Chellanam, Ernakulam, have been battling tidal flooding for years. Even when the budget talks about initiatives like “Kavach” for disaster preparedness,4 the state is not equipped to even recognise seasonal vulnerabilities like tidal flooding, as a disaster on a policy level. Hence, while the budget allocates for major one-time disaster events, the ones facing slow and seasonal vulnerabilities remain ignored.
  • Migration: A Need for Clarity and Inclusivity: The statement during the budget speech, “All migration will not be encouraged,” raises concerns due to its vague and undefined nature. While recognising unsafe migration is a positive step, there is an absence of clarity on what “desirable” migration is. Currently, women’s labour migration is heavily regulated by the state (Kodoth, 2018; 2020a), whereas student migration faces little to no oversight. This imbalance highlights the need for a more nuanced policy that safeguards vulnerable groups, particularly poor women, without restricting their autonomy. In the Gender Budget, NORKA’s “Subhayathra” scheme (fifty percent allotted for women) marks its focus on supporting “educated aspirants.”However, Kerala remains a significant supplier of women domestic and care workers to other countries. It is therefore necessary that the government facilitates safe migration in an inclusive manner.

Gaps: Areas missed in Budget priorities

Despite Kerala’s progressive social welfare policies, the state’s latest budget reveals critical gaps in addressing the needs of vulnerable communities. This session highlights three key areas where budget allocations fall short:

  1. ‘Guest Workers’ (Inter-state migrant workers): The contribution of inter-state migrant workers to Kerala and their exclusion from the organised labour structure gained attention during the Covid pandemic in the state (Joseph, 2023; Kodoth, 2021b). Health insurance for these ‘guest’ workers is a crucial social security scheme. While the allocation increased between 2023-24 and 2024-25, it stands the same for the current financial year at Rs. 1.25 crores. The revised estimate for 2024-25 stood at only Rs. 0.405 crores. Under the gender budget, 8 percent of funds under this scheme are allocated to women. No fund has been earmarked for the scheme on ‘Mobile creche and day care centres for the children of migrant labourers.’ In the year 2023-24, Rs. 0.643 crores were spent on the same, while this went down to Rs. 0.01 crores in 2024-25, with no funding this year. These could have significant consequences as the children of migrant workers are highly vulnerable. 
  2. Gender and child budget: The budget estimate on Anganwadi services (centrally sponsored scheme with 40 percent state share on expenditure) declines from Rs. 194.32 crores to Rs. 138 crores. (Correspondingly, there has been a decline in central share as well). In addition to this, there is a marginal decline in the remuneration for Anganwadi workers and helpers. This budget cut is crucial in the context of revamping Anganwadis in Kerala, with the inclusion of Smart Anganwadis. The health insurance for the Anganwadi workers and the helpers is also a Centrally Sponsored scheme and the budget estimate for it stands the same as last year at Rs. 1.20 crores. However, the revised estimates for both the Centre and the state were just one-third of the budgeted amount. This is in line with the long-standing non-acknowledgement of the community workers as ‘workers’ and the undervaluation of their work. The budget has also ignored the state’s ASHA workers as well, which has led to an ongoing strike by them demanding fair wages and recognition. In addition, the allocation of the Maternity Allowance to Workers in the Unorganised Sector declined from Rs. 6 crores to Rs. 4 crores. The allocation for transgender persons increased from Rs. 6.21 crores to Rs.  6.93 crores, which is still a negligible amount. 
  3. Concerning trends of allocation for Welfare of SC/ST/OBC & minorities: The budget shows a concerning trend of declining expenditure (Plan and Non-Plan) on the welfare of SC/ST/OBC & minorities. Budget estimate for 2024-25 was Rs 2354.82 crores, which decreased to Rs 2285.30 crores (B.E) this year. The actual accounts for 2023-24 were Rs. 2492.04 crores. Studies (Abhilash, 2023; Arun, 2018) highlight the imperative need for the state not to tend towards withdrawing or non-prioritising the welfare of SCs and STs. 

References  

About the Authors: 

Ayana Krishna D: Doctoral Scholar at the Centre for Development Studies, Thiruvananthapuram. Research areas – Gender, Women’s work, Climate change, Coastal communities of Kerala.
Sangeetha Kethapaka: Doctoral Scholar at the Centre for Development Studies, Thiruvananthapuram. Research areas – Macroeconomics, Monetary economics,  Fiscal and  Monetary policy.
Shraddha Jain: Doctoral Scholar at the Centre for Development Studies, Thiruvananthapuram. Major research areas and interests- women’s paid and unpaid work, gender relations, the care economy, Human Development.

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