THE Left Democratic Front (LDF) government in Kerala, led by Chief Minister Pinarayi Vijayan, has completed four years in its second consecutive term since May 2021. This marks the ninth year of continuous governance under his leadership. During this period, Kerala has faced a series of severe crises – natural disasters, pandemics, and financial constraints created by the central government – yet it has managed to maintain financial stability and implement large-scale development projects.

The first Pinarayi Vijayan-led LDF government assumed office in 2016 and soon had to face a range of unprecedented challenges. From the devastating floods of 2018 to repeated outbreaks of Nipah virus, the Ockhi cyclone, and, most significantly, the COVID-19 pandemic, Kerala’s resources and resilience were put to test.

Despite these setbacks, the government initiated and progressed with major infrastructure projects. These included the development of Vizhinjam International Port, expansion of the National Highways network, the laying of GAIL pipeline, and investments in the power sector. At the same time, the government gave top priority to people’s welfare. Free food kits were distributed to all families during Covid time, COVID-affected individuals were provided free medical care, and Social Security pensions were disbursed regularly.

When the LDF was re-elected in 2021, Kerala’s economy was still recovering from the compounded impact of past disasters and the pandemic. On top of this, the state had to deal with increasing financial restrictions from the union government. These included reductions in grants, limits on borrowing, and denial of funds for centrally sponsored schemes.

Despite these hurdles, the government successfully completed almost all major projects initiated during its first term. This achievement was made possible through careful financial management and a strong focus on improving the state’s own revenue.

SHRINKING CENTRAL

SUPPORT

A significant concern has been the consistent decline in Kerala’s share of revenue from the centre. In 2020-21, the central share in Kerala’s gross revenue was 44 per cent. This has steadily decreased to just 25 per cent in 2024-25. The revenue deficit grant and GST compensation together brought in Rs 31,068 crore in 2020-21. However, in 2024-25, this amount dropped to only Rs 6,716 crore – a reduction of Rs 24,352 crore over five years.

Moreover, the centre has reduced Kerala’s borrowing limit by Rs 39,720 crore, citing liabilities of agencies like the Kerala Infrastructure Investment Fund Board (KIIFB) and Kerala Social Security Pension Limited (KSSPL), along with treasury deposits by the public and government employees. Funds for centrally sponsored schemes and even the Capital Expenditure (CAPEX) loan were denied due to branding-related disputes.

The implementation of the Goods and Services Tax (GST) further constrained the state's fiscal autonomy. With the central government controlling GST policy through the GST Council, Kerala’s ability to generate tax revenue has been curtailed. The withdrawal of GST compensation from June 2022 has resulted in an annual loss of nearly Rs 12,000 crore to the state.

In 2025, the centre imposed a new condition requiring the state to either reduce its borrowing by Rs 3,300 crore or deposit Rs 600 crore into a newly mandated Guarantee Redemption Fund, meant to cover potential defaults by guarantee given for loan taken by state owned entities.

In spite of these financial pressures, Kerala has shown a remarkable improvement in internal revenue generation. The state’s own tax revenue rose from Rs 47,661 crore in 2020-21 to Rs 76,656 crore in 2024-25. The target for 2025-26 is Rs 91,515 crore. Non-tax revenue has also more than doubled, from Rs 7,327 crore in 2020-21 to Rs 16,568 crore in 2024-25, with an expected increase to Rs 19,145 crore in 2025-26. Together, these trends suggest that Kerala’s own revenue will cross Rs 1 trillion in the current financial year.

INCREASED PUBLIC EXPENDITURE

AND CAPITAL INVESTMENT

There has been a growing narrative that Kerala is heading into a debt trap. However, the actual figures tell a different story. Public expenditure in the state has grown steadily, reflecting a strong commitment to development and welfare.

• During the UDF tenure (2011–2016), the average annual public expenditure was Rs 68,169 crore.
• In the first Pinarayi led LDF government (2016-2021), this increased to Rs 1,15,378 crore.
• In the ongoing term (2021-2025), the average annual expenditure has risen to Rs 1,65,061 crore.

The estimated expenditure for 2024-25 is Rs 1.75 lakh crore, and the projected figure for 2025-26 is expected to cross Rs 2 lakh crore. Capital expenditure also saw a steady rise, increasing from Rs 16,787 crore in 2022-23 to Rs 16,880 crore in 2023-24. The figure for 2024-25 is likely to be even higher, despite fiscal constraints.

Contrary to the debt trap narrative, Kerala’s debt-to-GSDP ratio has shown a consistent decline:

• 2020-21: 38.47 %
• 2021-22: 36.30 %
• 2022-23: 35.38 %
• 2023-24: 34.20 %
• 2024-25: 33.90 %

In terms of absolute numbers, the state's total debt rose from Rs 2.96 lakh crore in 2020-21 to an estimated Rs 4.75 lakh crore in 2025-26. However, this increase is far below the historical trend, where the debt used to double every five years. If the earlier pattern had continued, the debt would have reached Rs 5.92 lakh crore by now. Instead, there is a reduction of Rs 1.17 lakh crore in potential debt, indicating responsible borrowing and sound fiscal management.

The financial stress faced by Kerala also highlights a deeper structural issue in India’s federal system. As per the 15th Finance Commission, the centre collects 62.2 per cent of the total revenue generated in the country, while the states receive only 37.8 per cent. However, states are responsible for 62.5 per cent of public expenditure. This mismatch puts enormous pressure on state finances and undermines the spirit of co-operative federalism enshrined in the Constitution.

The central government divides a portion of the tax pool to state governments, it is called divisible pool.  Each Finance Commission decides the percentage of tax to be divided to states and the share of each state from the divisible pool.  The 15th Finance Commission decided that 41 per cent of the Central Government Tax Pool will be divided among states.  Out of this, Kerala will get 1.92 per cent.  During the 10th Finance Commission, the share of Kerala from the divisible pool was 3.87 per cent. The 14th Finance Commission reduced the share to 2.5 per cent.  It can be seen that the share of Kerala became half during the 15th Finance Commission compared to the 10th Finance Commission. 

The central government collects various cess and surcharge in addition to tax.  This is a round about way to avoid dividing tax to states.  During 2024-25, the central government have amassed Rs 1.5 lakh crores on account of cess and surcharge.

DEVELOPMENT EFFORTS

CONTINUE UNINTERRUPTED

Despite facing several challenges imposed by the central government – such as restrictions on market borrowings and reductions in grants-in-aid – the state government has continued to carry out developmental activities without interruption. In many sectors, Kerala has emerged as a front-runner among Indian states.

Many reports by the central government, as well as national and international agencies, rank Kerala as the leading Indian state in various sectors and social security initiatives. Reports from the NITI Aayog, the Reserve Bank of India, the National Family Health Survey, the UN Development Programme, and the India Skills Report – all indicate that Kerala is making rapid progress in developmental activities.

The National Multidimensional Poverty Index (MPI) 2023 released by NITI Aayog confirms that Kerala has the lowest poverty rate in India. Even in the previous year, Kerala held the lowest position among all Indian states. The state is actively working towards eliminating extreme poverty.

According to the RBI Handbook, Kerala ranks first in the Human Development Index (HDI). The quality of life in Kerala is considered the best among Indian states, particularly in terms of education, healthcare, and social welfare. The percentage of people living in poverty in Kerala is just 0.44 per cent, compared to 22.93 per cent in Uttar Pradesh and 20.63 per cent in Madhya Pradesh.

Kerala also boasts a life expectancy of 75 years, while the national average is 70 years. In most human development indicators, Kerala has consistently ranked first among all Indian states.

Kerala has also received the First Performer Award in the startup sector, along with numerous other awards from the central government and various national and international agencies, recognising its achievements across diverse sectors.

Kerala’s achievements in several major infrastructure projects are also noteworthy. Some prominent examples include the Vizhinjam Port, National Highways development, Edamon-Kochi Power Highway, GAIL pipeline, and the innovative Water Metro project.

Vizhinjam Port: Kerala has witnessed a significant transformation in infrastructure development, marked by several large-scale projects. Among them, the Vizhinjam project stands out as a landmark initiative and is often referred to as the golden gateway to Kerala's future. This port has the potential to reshape not only the state's development landscape but also contribute significantly to the country's industrial growth. The state government has invested Rs 5,595 crore in the Vizhinjam project, which has a total estimated cost of Rs 8,867 crore. This means that around 63 per cent of the total cost is being borne by the state. Adani Corporation is contributing Rs 2,454 crore, while the central government has provided only Rs 817 crore as a Viability Gap Fund (VGF) loan. While the central government has extended substantial financial support and VGF assistance to many other major infrastructure projects across the country, its support for Vizhinjam has been notably limited. Despite this, the state government has remained committed to the project, investing heavily even during financially challenging times. This determination reflects the government’s strong will to realise the Vizhinjam project, viewing it as a vital step towards Kerala’s long-term growth.

National Highways Development: As the National Highways, which has always been a dream project of Kerala, nears completion, the role played by KIIFB needs to be highlighted. KIIFB paid Rs 5500 crore to the National Highways Authority to acquire land for the 45-meter National Highways. This is for the first time in the country that a state has had to spend 25 per cent of the total land acquisition cost.

Edamon-Kochi Power Highway: The most sought-after Edamon-Kochi power highway was made a reality by the LDF government, and the project significantly caters to the state's power consumption needs.

GAIL Pipeline Project: The Mangalore-Kochi ‘GAIL’ LPG pipeline was completed at a cost of Rs 5751 crore.

Water Metro: The Kochi Water Metro was made a reality by the LDF government.  Kochi Water Metro is the first of its kind in India and the largest integrated water transport system in Asia. It utilizes a fleet of battery-operated electric hybrid boats to connect various parts of the city.

Digital Science Park and Digital University: India’s first Digital Science Park and Asia’s first Digital University are established in Kerala.  Science Parks, Industrial Parks, Skill Parks, IT Parks are established and allotted even to small cities in the state.

Investors friendly State: According to ratings by the union government, Kerala has now emerged as the most investment-friendly state in the country. Over the past four years, nearly 300,000 new entrepreneurial ventures have been established across the state.

Social Security Measures: The government's contributions in the areas of social security, healthcare, housing, and education have been particularly noteworthy. Social security pensions of Rs 1,600 are being provided to around 62 lakh individuals. Under the health programme Karunya Arogya Suraksha Padhathi (KASP), approximately 42 lakh families receive free medical treatment worth up to Rs 5 lakh per year. Nearly five lakh homeless families have been provided with housing through the Life Mission initiative. In addition, the government has invested thousands of crores in modernising public education infrastructure, significantly improving learning environments across the state.

The second Pinarayi Vijayan-led LDF government successfully completed many of the projects initiated during its first term. Over the course of the nine-year rule of the LDF government, Kerala has been elevated to a level comparable with developed countries. The vision is to make Kerala a better place for future generations, ensuring employment opportunities within the state itself. Kerala’s financial journey over the past several years is a testament to resilience, meticulous planning, and strong governance.