Thiruvananthapuram: Battling a severe strain on its coffers, the Kerala government hiked several taxes and levies in its 2025-2026 budget, maintaining its approach of boosting revenue to bring its fiscal deficit under the recommended limit.
The state managed to bring down the deficit for 2023-2024 to under 3 percent, in line with the Fiscal Responsibility and Budget Management (FRBM) guidelines, but is still expecting to slightly breach the limit in 2024-2025 and 2025-2026.
Presenting the fifth budget of the second Pinarayi Vijayan-led government, Finance Minister K.N. Balagopal Friday said that despite major setbacks due to the lack of adequate allocation of grants and tax sharing from the Union government, Kerala’s fiscal deficit was brought down from 4.04 percent in 2021-2022 to 2.9 percent in 2023-2024. The revenue deficit reduced from 2.25 percent to 1.58 percent during the same period, while the debt to Gross State Domestic Product (GSDP) ratio decreased from 35.9 per cent to 34.2 percent.
The FRBM Act, 2003, limits the annual fiscal deficit of states to 3 percent and debt to GDP at 20 percent of the GSDP.
According to the revised estimates for 2024-2025, the state’s fiscal deficit is expected to be 3.5 percent, and the budget estimate for the year 2025-2026 expects a fiscal deficit of 3.1 percent. The revised 2022-2023 estimate recommended a fiscal deficit of 3.45 percent of GSDP.
“It has become clear that in tandem with substantial reduction in fiscal difficulties, our state is poised to be in a much better fiscal position in the coming years,” the minister said, adding that Kerala is all set to embark on a phase of rapid economic growth and a stage of “take-off”.
The minister said Kerala sustained its finances by augmenting its tax revenues and avoiding unnecessary expenses.
The Annual Financial statement said Kerala’s tax revenue income was Rs 74,329.01 crore in 2023-2024 and Rs 71,968.16 crore in 2022-2023. The minister stated that Kerala was able to pay off its previous liabilities to a large extent during that time.
Balagopal, however, clarified that Kerala’s deficit was not reduced by cutting developmental and welfare expenditure, and the government spending on this front saw a “considerable increase”.
“We can proudly say that the increase in our expenditure was due to the augmentation of our own revenue despite the drastic cut of more than Rs 50,000 crores in the central transfers to the state,” Balagopal said.
In the 2025-2026 Budget, Kerala has proposed an increased fee for different services in the court. The tax on e-vehicles that cost 15 lakhs has been hiked from 5 to 8 percent of the total cost, and for vehicles costing 20 lakhs, it is now 10 percent.
The road tax for vehicles older than 15 years is now 50 percent, while the tax levied on contract vehicles has been raised according to their seat capacity and amenities. An increase of 50 percent is also proposed in all the existing land tax slabs, from which an additional revenue of Rs.100 crore is expected. The state collected Rs 711.71 crore in land revenue in 2023-2024.
Reacting to the announcement, the opposition Congress said the budget was made of hollow words without taking into consideration the state’s fiscal realities.
“The government is comparing the data with 2020-2021. Because there was a huge growth in economic activities post-COVID. Everything was shut down during COVID-19,” Leader of Opposition V.D. Satheesan said in the assembly after the budget presentation. He said the state still hasn’t revised its tax structure based on the Goods and Services Tax (GST), and the hike in land revenue is a massive loot on the public.
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State’s strained finances
According to the 2023 Economic Review by the State Planning Board, Kerala’s per capita GSDP was 6.06 percent in 2022-2023, higher than the national average of 5.9 percent. However, the state was included in the ‘aspirational’ category that faces consistent fiscal challenges by the Fiscal Health Index-2025 prepared by Niti Ayog.
The report says that the state’s committed expenditure, including payment of salaries and pensions, constituted 56 to 68 percent of its revenue expenditure from 2018-2019 to 2022-2023. It added that Kerala’s allocation of social sector spending, including health and family welfare, was 6.4 percent in 2022-2023, higher than the national average of 5.6 per cent and 14 percent for education.
The report added that the state’s own revenues recorded a growth rate of 26.5 percent in 2022-23 compared to the previous year, while the own tax revenue increased by 23.3 percent during the same period.
A 2019 study by B.A. Prakash, former chairman of the Kerala Public Expenditure Review Committee, said that Kerala’s fiscal crisis is a “structural” and “persistent” problem. He said that since 2016, Kerala’s fiscal crisis has been similar to the situation in 1998-2001, when it faced its worst crisis due to high inflation, debt, and low tax revenue growth.
Prakash attributed the crisis to the state’s high expenditure with an excessive growth in government bureaucracy. The growth in committed expenditure over the years, including the revision of salaries and pensions once in every five years, led to a spurt in expenditure.
“Kerala has 122 departments, 1,200 local governments (panchayat & municipalities) , a large number of private aided educational institutions and semi government institutions,” the report said, adding the growing expenditure was hit by lack of resource mobilisation and the Centre’s imposition of a ceiling on the state’s borrowing limit.
On 17 December 2024, in response to a question raised by Kerala M.P. John Brittas, Union Finance Minister Nirmala Sitharaman said that the Net Borrowing Ceilings (NBC) of the Kerala government for the financial year 2024-2025 was fixed at Rs. 37,512 crore.
In 2023, the central government included off-budget borrowing, such as the loans availed by state entities and Special Purpose Vehicles (SPVs) in the state’s NBC. This included the Kerala Infrastructure Investment Fund Board (KIIFB)—deposits in public accounts as the state’s debt and are deducted from Kerala’s borrowing limit. Established in 1999, KIIFB funds the large-scale projects of the state.
“In addition to this, even the loans availed earlier in this regard were also deducted from the borrowing limits after the BJP government came to power,” the 2023 budget document said.
In early 2024, the Kerala government approached the Supreme Court against the Centre’s decision to subtract KIIFB borrowings from the state’s limit. The case is currently pending with a constitutional bench.
Kerala also attributed its financial strain to the low allocation of GST compensation, grant to local government, and the reduction in its divisive pool. The divisive pool is the portion of gross tax revenues distributed between the centre and states.
The Kerala government claims that its share, which was 3.88 per cent during the tenure of the 10th Finance Commission (1995-2000), dipped to a historical low of 1.92 percent during the 15th Finance Commission (2020-2026). Likewise, it said the share of the local self-governments in the divisible pool was 4.54 percent during the tenure of the 12th Finance Commission and declined to 2.68 percent during the 15th Finance Commission.
Major budget announcements: From ‘K Homes’ to IT parks
In this budget, the second Pinarayi government’s last budget before the state votes in local body elections this year, one of the first announcements by the finance minister was regarding the clearing of pension arrears. The minister announced that the final instalment of the service pension revision arrears amounting to Rs 600 crore will be disbursed in February itself, and the two instalments of pay revision arrears will be sanctioned during the current financial year.
Besides this, a project with a first phase funding of Rs 750 crore has been allocated for the rehabilitation of the Wayanad landslide victims. Funds, including the Chief Minister’s Disaster Relief Fund (CMDRF), State Disaster Management Authority, central grants, CSR initiatives, and other contributions will be used for the rehabilitation, with the remaining amount borne by the state.
The budget also announced the setting up of the ‘Loka Kerala Kendram’ to facilitate the ties with the diaspora and their home state. The Centre will help the diaspora population to arrange tour programmes to Kerala and also will have food courts serving local food and shops selling traditional goods. Rs 5 crore is earmarked for this scheme.
Rs 5 crore has also been set apart for the pilot implementation of the new project ‘K-homes’ to convert empty and unoccupied homes across the state to affordable tourist accommodations. The pilot project is to be implemented within a 10 km radius of the state’s major tourist attractions, including Fort Kochi.
The minister also announced the Hydrogen Valley project, executed in PP mode, to be piloted for domestic hydrogen production. An amount of Rs 5 crore has been set aside for the first phase of the project. Further, an amount of Rs 10 crores has been earmarked for the research and setting up of a domestic production unit of bio-ethanol, according to the Centre’s norm to blend 25 percent ethanol in petrol and other fuels.
The finance minister also said that the preliminary work for the Thiruvananthapuram Metro will begin in 2025. The expansion of the existing Kochi Metro and a new metro system in the Kozhikode district was also announced.
Rs 10 crore has been set aside for the Kochi-Sustainable Urban Restructuring Project that seeks to transform the city’s urban areas into “planned, vibrant, and active spaces” and remodel its cityscape. The project will be executed with private participation and will be implemented in 210 hectares of land, excluding the island area.
The budget also talked about the creation of Global Capability Centres (GCC) and IT parks. It announced Rs 10 crore for a world-class graphics processing unit (GPU) cluster in Thiruvananthapuram to make the state an important hub of AI (Artificial Intelligence) and AVGC (animation, visual effects, gaming, comics) sectors. An allocation of Rs 5 crore has been made for establishing GCC parks in the state. Rs 2 crores have been allocated to conduct an international GCC conclave this year.
An amount of Rs 293.22 crores has been allocated from KIIFB for establishing an IT park within a 5-lakh-square-foot area in a 25-acre campus near Kannur Airport.
An IT park will also be established in Kollam City on the land owned by Kollam Corporation. This will be formed through a tripartite agreement between KIIFB, KINFRA and Kollam Corporation. An IT park will be established on the campus of the Kallada Irrigation Project, situated in Ravi Nagar in Kottarakkara.
The budget also allocated Rs 10,431.73 crore for its health sector and Rs 3,061 for public works. Kerala government’s housing initiative ‘Life Mission’ has been allocated Rs 1,160 crores while its health care scheme ‘Karunya Arogya Suraksha’ has been allocated Rs 700 crore.
(Edited by Sanya Mathur)