From Fiscal Crisis to the Creation of Off-budget and Contingent Liabilities in Kerala

Kerala has become one of the most indebted states in India in recent years and faces severe debt sustainability issues. While Kerala has faced various levels of fiscal crisis since the 1980s, the nature of the crisis has undergone significant transformation in the last two decades, which can be attributed to the changing nature of fiscal federalism in India. The mounting contingent liabilities and off-budget borrowings, along with the high level of indebtedness, make this crisis unique, requiring an understanding of the dynamics of debt accumulation in Kerala and its implications from a policy perspective.

Kerala has been facing various levels of fiscal crisis since the 1980s, which is mainly attributed to the given structure of public expenditure and lack of public resource mobilisation, including the limitation of state government in raising its own resources for development (George 1990; Mohan and Shyjan 2005; Sebastian 2019). The fiscal stress has changed in the last two decades and reached its peak in 2001, 2011, and 2016. These fiscal crises are of varying intensities, and the government has responded by issuing a white paper specifying the fiscal condition of the government. However, fiscal indicators have been worsening in Kerala in recent years and the fiscal deficit, revenue deficit, and debt to GDP ratios were at 3.9%, 2.3%, and 39.10% respectively in 2022–23. According to the RBI Report 2022, Kerala has been facing acute fiscal issues and is categorised among India’s five most indebted states. The state’s fiscal problem has been exacerbated by the declining share of the divisible pool awarded by the finance commissions (Rajaraman 2017), which was 3.88% as per the the Tenth Finance Commission and fell to 1.93% as per the Fifteenth Finance Commission.