ANY budget is a statement of estimates of income receipts and expenditure of the government for the coming fiscal year. The Kerala Budget of 2026-27 goes much beyond into a political statement of a state government commitment to people, in the context of erosion of fiscal federalism and neoliberal straitjacketing.

The Kerala Budget of 2026–27 is a testimony to the LDF Government’s two-pronged strategy of development that prioritises the welfare of the people while simultaneously working vigorously to overcome the state’s infrastructure deficit and accelerate its transition to a knowledge economy. It was possible to combine these two apparently contradictory pursuits by relying on extra-budgetary resources for infrastructure construction. The success of this strategy during the 2016–2021 period was largely responsible for the Left’s consecutive victory in the legislative assembly for the first time.

NEAR ECONOMIC BLOCKADE BY UNION GOVERNMENT

The Union Government is determined to prevent a repeat of this success in the 2026 Assembly elections and has imposed severe cuts in the state’s annual normal borrowing. It has decided to account the borrowings of the special purpose vehicle for infrastructure development, as part of the state government’s borrowing and that too with retrospective effect. It may be noted that the borrowing of public sector infrastructure entities such as NHAI is still not considered part of public borrowing or public debt in Union Government budget accounting.

In addition, revenue transfers from the Union Government have also been sharply reduced. As a result, total revenue transfers from the Union Government, which stood at 5.52 per cent of GSDP in 2020–21, have steadily declined to 2.54 per cent in 2024–25. Consequently, total revenue expenditure of the state has declined from 18 per cent of GSDP in 2020–21 to 13.92 per cent in 2024–25. It was against this backdrop of a near economic blockade by the Centre that the final budget of the Second Pinarayi Government was presented.

ENHANCEMENT OF WELFARE PROGRAMS

The most important political statement is the total commitment of the Left to expand the welfare support for the people despite the above economic blockade by the Union government. That will be its first priority. The welfare pensions, stood at only Rs.600 for 32 lakh people when the LDF came to power in 2016 but have since been enhanced to Rs.2,000 for 62 lakh people. During the UDF Government (2011–2016), total expenditure on welfare pensions amounted to Rs.10,700 crore. Under the LDF Government (2016–2021), this increased to Rs.35,089 crore. During the current LDF Government (2021–2026), total expenditure is expected to reach Rs.54,000 crore. The present budget has allocated Rs.14,000 crore for the full payment of welfare pensions.

The major highlights of the budget have been a slew of new welfare programs and enhancements in welfare payments to the poor and further increases in emoluments for scheme workers. Rs.3,720 crore have been allocated for security payments to 16 lakh women homemakers in poor families. Similarly, Rs.400 crore have been allocated for scholarships for unemployed youth registered for skill courses. Workers in anganwadis, the ASHA programme, pre-primary education, mid-day meal services, and literacy volunteers - whose wages had been increased by Rs.1,000 three months ago - will receive another hike of Rs.1,000. Scheme workers in Kerala are guaranteed the highest wages in India.

The opposition has been quick to criticize the budget as an “election gimmick” and a set of “empty promises.” Their criticisms of the welfare proposals as unpractical given the current financial situation of the state government only betrays their anti-poor political bias and the political commitment of the Left to stand by the poor, however dire the economic situation is. However, the credibility of the budget proposals stems from the role played by the Left in initiating these welfare programmes and enhancing them in the past.

FOCUS ON SOCIAL SECTORS

The second key feature of the budget is its strong focus on social sectors. Thirty-four per cent of revenue expenditure is allocated to social services, with 62 per cent of that directed toward education and health. The employment guarantee programme, which has been abandoned by the Union Government, will be sustained by the state government, with an additional allocation of Rs.1,000 crore.

Fund devolution to local governments has been maintained and increased from Rs.57 crore in 2025–26 to Rs.17,901 crore in the current budget. The set back in the local government elections has not in any manner reduced the enthusiasm of the Left towards democratic decentralisation.

GOVERNMENT EMPLOYEES

A major grievance among government employees and pensioners has been arrears in DA and DR payments. The new budget ensures that DA and DR instalments will be sanctioned in full by the end of March, with arrears cleared over time. A Pay Revision Commission for employees has also been announced. Additionally, Kerala is moving from the existing contributory pension scheme to an assured pension scheme that guarantees 50 per cent of the last basic pay along with DR.

CAPITAL EXPENDITURE

Despite the committed revenue expenditure, the budget envisages a 20 per cent increase in capital expenditure. This would imply a fiscal deficit of 3.4 per cent of GSDP. Nevertheless, a major portion of infrastructure expenditure will still need to come from extra-budgetary resources. This means the new government will have to intensify its battle with the Union Government. After modifying the infrastructure SPV into a near-revenue model entity, the constitutional dispute in the Supreme Court will need to be vigorously pursued.

The most significant budget declaration is the proposal for a Regional Rapid Transit System (RRTS) for Kerala, similar to the Delhi–Meerut RRTS Corridor, with an expected cost of nearly Rs.2 lakh crore. A number of new arterial roads have also been announced. KIIFB, the infrastructure SPV, has undertaken 1,216 projects with a total outlay of Rs.96,554.53 crore to date. It also supports leveraging investment in national highways and the Vizhinjam harbour.

THE 16th UFC RECOMMENDATIONS

Although the capital expenditure-to-GSDP ratio, improved from 1.27 per cent in 2010–11 to 2.0 per cent in 2020–21, it has tended to decline in recent years due to squeeze on central transfers. The central transfers to Kerala constitute only less than 20 per cent of the over all revenue receipts.

The Union Finance Commission (UFC) report was tabled after the state budget presentation. Already a serious blow has been dealt by abolishing revenue deficit grant from which the state received ₹53,000 crore during the last five years. The meagre advantage that the state received from the improvement in tax share from 1.9 per cent to 2.4 per cent has been more than neutralised by the abolishment of special grants as per “grand deal” worked out with the Union Government and UFC.

CAMPAIGN AGAIN CENTRAL DISCRIMINATION

The political implication is that mobilisation of the people against Union government discrimination would be a key political agenda in the forthcoming Assembly Election. The situation is that Kerala which is a consumer state dependent on inter-state trade for 70 per cent of its consumption gets relatively low share of IGST (tax on inter state trade). Kerala will have to fight a protracted political war to make GST state friendly and reforms in GST implementation to ensure that it becomes a truly destination-based tax. The buoyancy of own revenue of the state government becomes very vital for the financial health of the state government.

Come what may, the first commitment of the Left will be for the welfare of the people. Kerala’s development strategy will be crucially dependent on continued extra budgetary resource mobilization for infrastructure development. It is for this mandate that the Left Democratic Front will be approaching people.

Both the UDF and BJP will have to clarify their positions. While they denounce the welfare announcements as illusory, will they attempt to dismantle them? While they oppose extra-budgetary borrowing, what alternatives do they propose to overcome infrastructure backwardness? One more continuous term is necessary if welfare programmes are to be sustained and infrastructure initiatives successfully completed.