Kerala’s newly elected government led by Chief Minister V D Satheeshan faces one of the toughest fiscal challenges in the state’s history, inheriting mounting debt, rising payment arrears, stressed treasury operations and growing liabilities from off-budget borrowing mechanisms, according to a new fiscal status report released by the Finance Department.
The report paints a picture of a state struggling to balance welfare commitments, infrastructure ambitions and fiscal sustainability, with outstanding liabilities crossing ₹5.07 lakh crore and committed expenditure consuming nearly 77% of total revenue receipts.
Debt burden limits fiscal flexibility
At the heart of Kerala’s fiscal challenge is a rapidly expanding debt burden that has significantly reduced the government’s financial flexibility.
Outstanding liabilities have risen to ₹5.07 lakh crore, while interest payments alone account for 20.9% of total revenue receipts. Combined with salary and pension commitments, these expenditures consume the bulk of the state’s revenue, leaving limited resources for productive investments.
The report argues that Kerala has increasingly moved away from the principle of borrowing for growth-generating investments, with capital expenditure falling to just 1.3% of Gross State Domestic Product (GSDP), among the lowest levels in the country despite one of the highest fiscal deficits.
Treasury stress signals deeper financial strain
The state’s fiscal stress is becoming increasingly visible in treasury operations. Data cited in the report show Kerala has relied on the Reserve Bank of India’s Ways and Means Advances facility every year since 2015 to manage cash flow mismatches. The situation worsened significantly during the pandemic and has deteriorated again in recent years.
In 2025, Kerala reportedly remained under Ways and Means Advances for 262 days and operated under overdraft conditions for 84 days, indicating persistent liquidity pressures.
The growing dependence on short-term RBI borrowings is not only a sign of cash flow stress but also adds to the state’s financing costs.
Nearly ₹49,000 crore in unpaid obligations
One of the most significant challenges facing the new administration is the accumulation of unpaid liabilities.
According to the report, arrears related to Dearness Allowance for employees amount to ₹21,670 crore, while Dearness Relief dues for pensioners stand at ₹14,387 crore.
Additional obligations include ₹3,431 crore owed to banks and contractors under bill discounting arrangements. Together with other deferred payments, total accumulated obligations are estimated at ₹48,733 crore.
The report notes that these pending liabilities are almost equivalent to Kerala’s annual net borrowing capacity, underscoring the scale of the financial challenge.
KIIFB under scrutiny
The Kerala Infrastructure Investment Fund Board (KIIFB), once projected as an innovative infrastructure financing vehicle, has emerged as a major area of concern.
According to the report, KIIFB currently carries around ₹21,000 crore in outstanding loan liabilities that may ultimately have to be serviced by the state government. In addition, infrastructure projects worth approximately ₹35,000 crore remain to be funded.
The report cites observations made by the Comptroller and Auditor General (C&AG), which suggest that KIIFB lacks an independent revenue base and that its borrowings are effectively state liabilities.
If that assessment holds, KIIFB’s financing model may no longer provide the fiscal flexibility originally envisioned and could instead constrain Kerala’s future borrowing capacity.
Costly route to infrastructure financing
The report also questions whether KIIFB has delivered meaningful savings for the state.
Its cost of borrowing is estimated to be 1 to 1.5 percentage points higher than that of the state government, raising concerns about the efficiency of routing infrastructure financing through a parallel borrowing mechanism.
The new government is expected to evaluate whether the existing KIIFB structure remains financially viable and whether its governance framework requires reforms.
End of central support adds pressure
Kerala’s fiscal situation has become more challenging following the end of key support mechanisms from the Centre.
The cessation of GST compensation and Revenue Deficit Grants has removed important fiscal cushions that helped the state manage expenditure commitments over the past decade.
Although the Sixteenth Finance Commission marginally increased Kerala’s share in tax devolution, it simultaneously discontinued Revenue Deficit Grants and adopted a stricter approach toward fiscal deficit targets.This combination could further tighten fiscal space in the coming years.
Investment and growth challenge
The report also links Kerala’s fiscal difficulties to relatively weak private investment inflows and slower economic expansion.
Without stronger growth in economic activity, tax collections may struggle to keep pace with expenditure commitments, making debt reduction increasingly difficult.
For the new government, fiscal consolidation may therefore depend not only on expenditure management but also on reviving private investment, improving tax buoyancy and restoring confidence in the state’s finances.
A defining challenge for the new administration
The fiscal status report suggests that the Satheeshan government begins its tenure with limited room for manoeuvre.
Managing a debt burden exceeding ₹5 lakh crore, addressing nearly ₹49,000 crore of pending obligations, restructuring KIIFB liabilities and restoring treasury stability will likely dominate the state’s financial agenda over the coming years.
The challenge for the new administration will be balancing fiscal discipline with development priorities while ensuring that growth does not become a casualty of mounting debt and shrinking fiscal space.