Kerala veers from impressive social gains to mounting fiscal strain

Writing about the food habits of Malayalees in the 19th century in Pathonpathaam Noottandile Keralam (Kerala in the 19th Century) — a 1,300-page tome that sparkles with insight and scholarly wit — P. Bhaskaranunni observes that two meals a day were invariably the norm for the general populace. “Rice was very rare. What was available was of low quality. They somehow subsisted on gruel or mash made from chama (little millet), thina (foxtail millet), mula nellu (bamboo rice), koovaraku (finger millet), muthira (horse gram) and payar (beans).”

Elsewhere, he writes about the massive crop damage caused by the torrential rains in 1852 and again in 1853. “Even money could not buy a grain of rice. It was the year that Travancore imported rice for the first time. The imports were from Bengal.” These two images from the past illustrate how Kerala has changed, and yet not changed. To the Gen-Z of 21st-century Kerala, for whom Mexican tacos or Italian pizzas are only a few keypad taps away, the frugal food habits of their 19th-century ancestors would appear incomprehensible or utterly primitive. Yet one cannot discount the fact that 21st-century Kerala remains pitiably dependent on sister States for its staple diet — rice. Domestic rice production continues to fall prey, year after year, to the whims of the monsoon rains.

Presenting modern Kerala’s first budget in 1957, C. Achutha Menon, the Finance Minister in the first Communist government led by the inimitable E.M.S. Namboodiripad, observed that the greatest concern, both for the people and the government, was the “food problem.” But as he noted elsewhere in the same June 7, 1957 speech — and what now sounds eerily prophetic — it was not young Kerala’s only problem: “Density of population, scarcity of arable land and dearth of industries have contributed to unemployment, the most acute problem of Kerala.” It should be remembered that Achutha Menon — a gentle soul who would later become Chief Minister under a Communist Party of India (CPI)-Congress alliance and come to be regarded as the best Kerala has had — was speaking at a time when the population of the fledgling State was a mere 1.50 crore. What may seem astonishing is that if one were to transpose his words into the latest budget of Kerala — a Kerala of 3.4 crore people and a diaspora spread across the planet — they would not be out of place.

The problems he outlined persist, notwithstanding the firm belief held by K.N. Balagopal, Finance Minister in Kerala’s current Communist Party of India (Marxist)-led Left Democratic Front government, that the State’s budget size will soon touch ₹2 trillion. Since those distant points in time — the vicissitudes and romance of the 19th century and the politically turbulent years of the mid-20th century — Kerala’s economy and the living standards of its people have undeniably transformed beyond recognition. The State’s enviable literacy rate, low infant mortality, and high life expectancy, comparable to those of the developed West, gave rise to what has come to be hailed as the Kerala Model. This human-development paradigm evolved over decades, its contours shaped by Kerala’s distinctive political and socio-economic milieu, perceptive government policies such as land reforms and decentralised local governance, and constructive public action. Even so, despite strong social indicators in health, education, and social welfare, Kerala continues to grapple — albeit in broader and more complex dimensions — with many of the same problems that Achutha Menon identified in his first budget more than six decades ago. The review that follows examines the multiple pathways of Kerala’s economic evolution, its current status, the challenges it faces, and the recommendations of the 16th Finance Commission on the sharing of resources between the Centre and the States.

In the Economic Review 2024, the State Planning Board observed that Kerala ranks among the top 10 Indian States in terms of per capita income and Gross State Domestic Product (GSDP). According to the document, the Kerala economy recorded “robust” growth in 2023-24. The real GSDP stood at ₹6,35,13,653 lakh (Quick Estimates), registering a growth of 6.5%, compared to 4.2% in 2022-23. “The real Gross State Value Added (at 2011-12 prices) increased to 7.2% in 2023-24 from 5.3% in 2022-23. GSDP at current prices is ₹11,46,10,867 lakh in 2023-24, reflecting a growth of 11.9%, compared to 10.7% in 2022-23. The per capita GSDP of Kerala increased by 5.5% to ₹1,76,072 in 2023-24, against the national average of ₹1,24,600,” it noted, adding that the average income per person in Kerala is higher than the national average.

Growth in agriculture and production has remained sluggish at best, leaving Kerala with the now-familiar “consumer State” tag. A narrow geographical region squeezed between the Western Ghats and the Arabian Sea, 21st-century Kerala faces stiff challenges arising from rapid urbanisation and its associated problems. In 1901, the combined population of Travancore, Cochin, and Malabar stood at 0.64 crore, of which 92.9% lived in rural areas. The 2011 Census showed that 47.7% of the people lived in urban areas — nearly half the total population. That said, Kerala’s journey to its present stage — shaped by global, national, and local dynamics — has been remarkable.

In the latter decades of the 20th century, Kerala’s extraordinary achievements in basic human development indicators despite its low per capita income drew social scientists and development economists to the small State. The legacies of successive Congress and Left-led governments, and the achievements in literacy, education, public health, and infant mortality, have been nothing short of impressive. It has been argued that the initial conditions were ideal for the evolution of what has since come to be hailed as the Kerala Model of Development. These conditions were shaped by Kerala’s unique history of social reform in the late 19th and early 20th centuries, which placed great emphasis on universal education, women’s empowerment, and social action, the national fervour of the Freedom Struggle, and the subsequent emergence of a strong Left and a participatory people’s planning process.

Noted development economist K.P. Kannan, in Kerala ‘Model’ of Development Revisited: A Sixty-Year Assessment of Successes and Failures, observed that during the first phase of this model — from 1960-61 to 1986-87 — growth was unimpressive not only in comparison to the national average, but also “bordered on stagnation” when viewed in per capita terms. “However, growth started picking up a few years after the acceleration in growth in the national economy. This was largely contributed by the increasing flow of remittances to the Kerala economy made possible by large-scale migration of its working-age population, mostly men, to work in countries in West Asia called the Gulf countries,” notes the paper published by the Centre for Development Studies (CDS), the institution established by the eminent economist K.N. Raj in 1971.

One cannot overstate the role of foreign remittances in Kerala’s economic growth story. This phenomenon was driven by international demand for labour, especially in the oil-producing Gulf nations of West Asia. Estimates of average remittances indicate an increase from around ₹530 crore during the 1980-85 period to over ₹10,800 crore during 1995-2005. According to the Kerala Migration Survey 2023 (KMS 2023), remittance inflows rose from ₹85,092 crore in 2018 to ₹1,44,640 crore in 2021-2022 and ₹1,90,734 crore in 2022-2023. KMS 2023 pegged remittances in 2023 at ₹2,16,893 crore. The survey was conducted by the Gulati Institute of Finance and Taxation (GIFT), with technical support from the International Institute of Migration and Development (IIMAD), at the behest of the Kerala government’s Department of Non-Resident Keralites Affairs (NORKA). “While the rise in remittance inflows in 2018-2019 could be attributed to the 2018 Kerala floods that led emigrants to send more money than usual to support relief and reconstruction, the spike in 2022-2023 could be attributed to post-pandemic recovery and a general rise in migration numbers,” the survey notes. The number of Keralites living abroad rose from 1.4 million in 1998 to 2.4 million in 2013, it adds.

In the 1980s, the State government’s Economics and Statistics Department conducted a survey on how Gulf remittances were utilised in Kerala. Submitted in 1988, the report observed a “considerable increase” in the assets of households receiving inward remittances from abroad, compared to other households under study. Yet even then, this slim document — prepared on the recommendation of a Subject Committee on Economic Affairs of the Kerala Legislative Assembly — had forewarned of a problem that Kerala grapples with today, in the aftermath of the COVID-19 pandemic and the global lockdown that spurred a “return migration”: “About 70% of the Gulf-returned persons are below the age of 40 and hence their rehabilitation would be a very important problem for Kerala,” the report warned.

It has often been stated that one of the major tasks confronting 21st-century Kerala will be finding suitable employment for its youth. The State has faced the issue of unemployment — especially that of the educated unemployed — for quite some time now. According to the Periodic Labour Force Survey (Annual Report 2023-24) published by the Ministry of Statistics and Programme Implementation, Kerala has an unemployment rate of 7.2% for persons aged 15 years and above, compared to the all-India level of 3.2%. “In fact, high rates of unemployment, and unemployment among the educated, have been identified as the visible face of a mismatch between economic growth and human development in the State. With economic growth picking up in the nineties along with structural change, the problem of unemployment has acquired a new dimension of mismatch between demand and supply of skills, both in terms of quality and quantity,” the State Planning Board observed in a working-group paper on labour and labour welfare for the 13th Five-Year Plan period (2017–2022). Traditionally, Kerala’s strong trade-unionist legacy has been blamed for the perceived lack of industrial growth. The CPI(M)-led Left Democratic Front (LDF) government, which has been in power for two terms since 2016, has sought to change the deeply entrenched perception that Kerala is scarcely an ideal destination for industrial investment. Presenting the State Budget for 2025-26 in February 2025, Finance Minister K.N. Balagopal noted that Kerala topped the Ease of Doing Business index published by the Union government. “From the 15th position in 2021, we now stand first,” Balagopal said. In the 14th Five-Year Plan document, the State government, with its emphasis on building a knowledge economy, observed that Kerala has high rates of youth unemployment, and that the creation of “modern employment” for the youth will be a priority.

Government data indicated robust growth across sectors in 2023-24. While the primary sector grew at 4.7%, secondary sector growth stood at 4.1%. The tertiary sector, meanwhile, posted “strong growth” of 8.9% in that fiscal year. Although tourism and Information Technology have emerged as major revenue generators and job providers for Kerala in recent decades, its agriculture and production sectors continue to lag. Low productivity levels compared to other States, small and fragmented production and supply chains, underdeveloped post-harvest facilities, labour shortages, and weak research extension have been identified among the “critical gaps” plaguing the farm sector. Citing land-use data for 2023-24, the Economic Review noted that out of the total geographical area of 38.86 lakh hectares, the total cultivated area and net area sown were 25.36 lakh hectares (65.3%) and 19.7 lakh hectares (50.8%), respectively. In the case of rice — Kerala’s staple food — the area under wetland paddy declined from 7.79 lakh hectares in 1960-61 to 1.79 lakh hectares in 2023-24, according to government data. “Moreover, the productivity of the crop is very low in the State (2,790 kg/hectare), though it is higher than the national average (2,424 kg/hectare). There has only been a marginal increase in the productivity of rice in the past four decades,” the State Planning Board noted.

With its 590-km coastline, it is unsurprising that fisheries have long been central to Kerala’s economy. The State is currently the third-largest seafood exporter in the country by volume and the second-largest by value. In 2023-24, Kerala’s marine fish production reached 5.81 lakh metric tonnes (MT), while inland fish production stood at 2.51 lakh MT. During the same period, the State exported 1.97 lakh MT of seafood, amounting to ₹7,231.84 crore. However, the past few decades have been difficult for Kerala’s coastal communities. Severe coastal erosion, the effects of climate change, and declining fish stocks have placed them under immense strain. Most recently, Kerala’s seafood exports were among the first to be hit by revised U.S. tariff policies.

A broader view of Kerala’s exports shows that the total value of goods shipped abroad increased from ₹25,441 crore in 2014-15 to ₹71,865 crore in 2019-20, before falling to ₹40,388 crore in 2024-25.

But when one gets down to brass tacks, it is, as the title of Colin Vearncombe’s (Black) song goes: All We Need Is The Money. Managing State finances has never been an easy task, but in recent years it has become particularly complex, according to States such as Kerala, which accuse the Union government of attempting to centralise powers. The overhaul of the tax regime and the States’ complaints about the skewed sharing of financial resources between the Centre and the States have sparked heated debates over the future of cooperative and fiscal federalism. In Kerala’s case, the State’s traditional emphasis on social welfare and its development plans are facing mounting pressure from a shrinking fiscal space. Furthermore, its share of the divisible pool fell from 3.88% under the 10th Finance Commission to 1.92% under the 15th Commission. The Left government has consistently blamed the Bharatiya Janata Party (BJP)-led Union government’s fiscal policies for the prolonged financial squeeze Kerala has been experiencing. Policies that drew the State’s ire include the decision to trim its borrowing space by treating the “off-budget borrowings” of the Kerala Infrastructure Investment Fund Board (KIIFB) and the Kerala Social Security Pension Ltd. (KSSPL) as direct State debt, and the discontinuation of the GST compensation after the five-year period.

The biggest challenge faced by successive State governments in Kerala has been keeping expenditure down without undermining its pro-social sector fiscal policies. Salaries and pensions take away a huge chunk of the State’s revenues. Take, for instance, social security and welfare fund board pensions: close to 60 lakh people benefit from a monthly pension of ₹1,600. In June 2025, Finance Minister Balagopal stated that the LDF government — both the current administration and the previous one led by Pinarayi Vijayan — has spent ₹73,654 crore on these pensions. The present LDF government has spent ₹38,500 crore in its first four years. In his 2025–26 Budget, Balagopal noted that the government spends more than ₹11,000 crore a year on social security and welfare fund board pensions alone. Nearly two decades ago, the second Kerala Public Expenditure Review Committee, in its first report (2007–08), observed that Kerala’s salary and pension expenditure together constituted, on average, roughly 50% of total revenue expenditure. As salary expenditure accounted for more than one-third of the State’s revenue expenditure, it was advisable to contain their aggregate growth so that more resources could be channelled towards public services, the Committee had noted. This committed expenditure continues to make a significant claim on the State’s income. Salaries and pensions, as a percentage of total revenue expenditure, stood at 45% in 2022-23 and 2023-24.

Without doubt, a singular event that has had a deep impact on State finances and Kerala’s overall economy in recent years has been the introduction of the GST regime in 2017. In the 14th Five-Year Plan for the State (2022–2027), the Kerala State Planning Board observed that mobilising resources for the plan period would prove a “challenging task.” Under the new tax regime, Indian States ceded taxation rights on as much as 52% of their own tax revenues to the GST Council. “A comparison of the average annual growth rate of taxes subsumed by GST over the pre-GST years 2014-15 to 2016-17 with the growth of SGST and IGST settlement revenues during 2017-18 to 2019-20 reveals that the rates for Kerala fell significantly from 8.67% to 3.47%,” it noted. The Planning Board further observed that the attrition in Kerala’s own tax and non-tax revenues would make access to enhanced Central transfers to fund budgetary expenditure all the more important. This observation carries significant political and financial implications for the State. Although Kerala, along with other States, battled hard for an extension of GST compensation, citing the economic impacts of the COVID-19 pandemic, the Centre has not relented. On the other hand, the revamp of the State GST Department and tighter tax collection has yielded results for Kerala. The State’s Own Tax Revenues (SOTR) steadily improved from ₹47,661 crore in 2020-21 to ₹76,656 crore in 2024-25. Non-tax revenues grew from ₹7,327 crore to ₹16,568 crore during the same period.

The ‘KIIFB story’ has an important place in the recent development and financial landscape of the State. In June 2016, after the LDF government led by Pinarayi Vijayan was sworn in, the then Finance Minister T.M. Thomas Isaac, an economist of note, presented a white paper on the state of State finances in the Legislative Assembly. Dr. Isaac’s White Paper roundly blamed the previous Congress-led United Democratic Front (UDF) government for grave financial mismanagement. Dr. Isaac had pointed to a negative cash balance in the treasury, neglect of deficit targets, and immediate liabilities amounting to ₹10,000 crore. The UDF government, the paper said, neither trimmed the rising expenditures nor increased revenues. In his white paper — which predictably caused a furore in the Opposition benches — Dr. Isaac posed three questions: How can Kerala increase its tax revenue by 20% to 25%? How can it slash revenue expenditure without such an action compromising the government’s spending on welfare and capital projects? Since it would take some years to bring the revenue deficit under check, how can the State accelerate capital expenditure without any delay? Dr. Isaac’s reply to the largely rhetorical third question was KIIFB, a financial entity that was originally established in 1999. What the LDF government under Dr. Isaac’s guidance did was to comprehensively amend the KIIFB Act, 1999, and incorporate provisions in the legal framework to equip KIIFB “to utilise innovative methods of raising finance authorised by the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI)” for funding infrastructure development. Going by the latest available data, KIIFB has so far approved 1,180 projects worth ₹89,941 crore. This includes 1,173 infrastructure projects totalling ₹69,941 crore and seven projects totalling ₹20,000 crore in the land acquisition pool. As of July 31, 2025, KIIFB has disbursed ₹36,160 crore to various projects.

In September 2025, Finance Minister Balagopal flew to New Delhi to hand over a Supplementary Memorandum to the 16th Finance Commission. Kerala had presented its initial memorandum to the Commission headed by Arvind Panagariya when the panel visited Thiruvananthapuram in December 2024. Two developments in 2025 that threatened significant setbacks for its economy, however, had prompted Kerala to draft the supplementary memorandum; the first was the combined reciprocal and penal tariffs of 50% imposed by the United States’ Donald Trump administration on Indian goods. The second, a decision by the Goods and Services Tax (GST) Council to revamp the tax structure into a two-tier one of 5% and 18%. To absorb the economic shock of the two developments, Kerala sought supplementary grants and eligibility for a “temporary extra borrowing limit” of 0.5% of the Gross State Domestic Product (GSDP). The GST rate rejig, Kerala feared, would sharply drop its annual revenues by ₹8,000 crore to ₹10,000 crore. On another front, Trump’s “tariff war” and the uncertainties that it entailed meant big trouble for Kerala whose export sector does big business with the U.S. in marine products, spices, textiles, coir and cashew. Such has been the concern over Trump’s tariffs that the Kerala State Planning Board and the Gulati Institute of Finance and Taxation (GIFT), an autonomous institute under the State Finance Department, even organised a round table in August 2025 to discuss how the State should move forward. Balagopal wanted the Finance Commission to consider these developments and their impacts on the Kerala economy when drafting its recommendations.

In its initial memorandum to the Commission, Kerala had already urged the panel to raise the share of States in the divisible tax pool from the present 41% to 50% and rework the formula used for resource sharing among States. Kerala had also requested the Commission to frame recommendations for reducing the imbalances in resource sharing, noting that it faced a drastic cut in share from 3.88% under the 10th Finance Commission to 1.92% under the 15th Commission. These interactions with the Finance Commission are part of a larger, protracted struggle Kerala’s Left government, which is in its second successive term under Pinarayi Vijayan, has pursued in recent years. Two back-to-back flood disasters in 2018 and 2019 and the COVID-19 pandemic have placed State finances under immense strain. Kerala has repeatedly accused the BJP-led Central government of fiscal bias and deliberate, politically motivated attempts to choke it financially.

At the threshold of the second quarter of the 21st century, the Kerala economy faces a mix of unique challenges and promising opportunities. On the development front, the Vizhinjam International Seaport Ltd. in coastal Thiruvananthapuram — formally inaugurated by Prime Minister Narendra Modi in May 2025 — offers much hope. As Chief Minister Pinarayi Vijayan said at a recent Kerala-European Union conclave on the Blue Economy, Kerala “is striving to build a climate-resilient economy where green jobs and sustainable livelihoods emerge as the foundation of the State’s future.” The State has set ambitious goals: achieving 100% renewable-energy use by 2040 and becoming net carbon-neutral by 2050. Yet the hurdles are significant. A rapidly urbanising State with high population density, Kerala also confronts an ageing population and a declining fertility rate. These, the Economic Review 2024 notes, are reflected in environmental degradation, pressure on resources, rising unemployment, outmigration and demographic imbalances. At the same time, nationalisation drives in many countries — especially in the Gulf — and the rise of technologies such as artificial intelligence have reshaped the global labour market, triggering a wave of reverse migration. In September, Law and Industries Minister P. Rajeeve told the State Assembly, citing a LinkedIn report, that 40,000 Keralite professionals had returned home. While he framed this as an opportunity to tap their skills, critics argue that it also signals uncertainty for foreign remittances — a long-standing pillar of Kerala’s economy.

As this piece is being written, a heated political debate is under way over Kerala’s persistently high retail inflation. The State’s year-on-year inflation rate for August 2025 stood at 9.04%, the highest among major States, against the all-India rate of 2.07%, according to the Consumer Price Index data released by the Ministry of Statistics and Programme Implementation. Meanwhile, building climate resilience has become impossible to postpone. The back-to-back floods of 2018 and 2019, followed by a series of natural disasters — including the Wayanad landslides of July 30, 2024 — have claimed hundreds of lives. Recurring health emergencies, such as Nipah virus outbreaks and other zoonotic diseases, add to the strain. How Kerala navigates these challenges, while shaping new development models for progressive societies and for India as a whole, will be watched closely in the days to come.

This article is part of The Hindu e-book. Kerala: a model State’s paradox