The previous Left Democratic Front (LDF) government has left its successor with accumulated payment arrears amounting to Rs 48,733 crore, almost as large as the state’s net annual borrowing, said a status report on Kerala’s fiscal health, prepared by an expert committee.
The report, prepared by a team headed by former Cabinet Secretary KM Chandrasekhar, estimated the state’s outstanding liabilities at Rs 5.07 lakh crore.
The status report, tabled at the Legislative Assembly on Thursday, June 4, said that the state has been violating the basic tenet of ‘borrow to invest, growth will repay’ in a big way and thereby weakening the growth generating capacity. The report was also highly critical of the Kerala Infrastructure Investment Fund Board (KIIFB), calling it a parallel governance structure which is compounding state’s financial stress. The unmet loan liability of KIIFB is around Rs 21,000 crore.
The report recommended the UDF government to ‘take harsh political decisions’ regarding the salaries and pensions, which accounts for 80% of its spending.
KIIFB ‘draining’ exchequer
As per the report, KIIFB has an unmet loan liability of around Rs 21,000 crore while projects costing around Rs 35,000 crore are still needed to be funded.
The committee remarked that there were fundamental flaws in the constitution of KIIFB and it cannot continue in its present form. The panel said that functioning of KIIFB violates the Article 266(1) of the Constitution which demands a consolidated fund for all revenues received and loans raised by the government.
“This cardinal principle has been breached by earmarking revenue streams, principally 50% of the Motor Vehicle Tax and the entire Petroleum Cess, directly to KIIFB year after year. The right way would have been to pass on funds through the State Plan and the Budget on the expenditure side. The present system cannot obviously continue,” it said.
The panel also questioned the lack of transparency in the functioning of KIIFB. “KIIFB also seems to be virtually outside the scope of audit by the C&AG, even though it deals with large amounts of revenue, spends public money raised through loans, and virtually functions outside governmental control, with the onus of repayment falling squarely on the government through guarantees and other instruments.
The Committee therefore suggests that KIIFB be brought under the budgetary control of the concerned administrative departments and the Finance Department. It should also be subjected to a Performance Audit by the C&AG immediately,” it added.
Pointing out that the KIIFB borrowings were adversely affecting the state's own borrowing capacity, the committee said that the cost of raising funds by KIIFB is about 1 to 1.5 percentage points higher than that of the state. “Its borrowings are now state borrowings. Its financing costs are consistently higher than government borrowing rates,” the panel said.
The report also criticised the LDF government's choice of projects stating that KIIFB’s project distribution reflected political rather than strategic prioritisation. Figures showed that Kannur district, which is a CPI(M) stronghold, alone accounted for over 20% of total approved amounts and 19% of payments released. With Thiruvananthapuram (17% approved, 17% released) and Ernakulam (11% approved and released), three districts constituted nearly half the total. Neither human development indices nor economic need indices provide an obvious justification for this concentration, the panel noted.
Mounting arrears, bleeding PSEs
The total payment arrears, which include the obligations already incurred and legally due, but not yet discharged, is around Rs 48,733 crore. This includes Rs 21,670 crore Dearness Allowance arrears, and Rs 14,387 crore under Dearness Relief. Payments due to banks and contractors on bill discounting add up to Rs 3,431 crore.
The report said that the public sector enterprises have been draining the state’s resources, with Kerala State Electricity Board Limited, Kerala Water Authority and Kerala State Road Transport Corporation together accounting for nearly 65% of the total net loss of the PSEs in Kerala.
“Like KIIFB, KSEBL too has been violating the cardinal principle that all revenues of the state should flow to the Consolidated Fund by withholding electricity duty collected from the consumers during the last three decades,” the panel observed.
The committee suggested merging the profit-making Kerala State Beverages (Manufacturing and Marketing) Corporation and the Kerala Civil Supplies Corporation, which is bleeding the exchequer. “The Committee is of the view that merging these two enterprises into a single corporation with separate divisions for liquor distribution and civil supplies/provisions would enable the Government to offset the losses of the civil supplies division against the profits of the beverages division, thereby substantially reducing the tax outgo,” it said. The panel asked the government to consider disinvestment, privatisation or closure of non-strategic public sector enterprises.
State’s Committed Expenditure burden
The report said, in 2024-25, Kerala's committed expenditure on salaries (₹39,904 crore), pensions (₹27,885 crore), and interest payments (₹29,138 crore) totalled ₹96,927 crore, consuming 77.6 per cent of all revenue receipts. This is projected at 77 per cent in 2025-26 revised estimates. Against a national average of 46.1 per cent, Kerala's committed expenditure burden is more than one-and-a-half times what comparable states carry, leaving barely one rupee in four for everything else: schools, hospitals, roads, welfare programmes, and support to local governments, the report said.
The corollary of high committed expenditure is low developmental spending, the report said. At 39.9 per cent of aggregate disbursements in 2024-25, Kerala's development expenditure stands at barely three-fifths of the national average of 63.5 per cent. This is the human cost of fiscal stress, a direct constraint on the government's ability to invest in its people's future.
Challenges
The committee has also taken into account the challenges faced by the previous government, including a strained fiscal relation with the Central government. The Fifteenth Finance Commission had reduced Kerala’s share in the divisible pool of central taxes from 2.5 per cent under its predecessor to 1.925 per cent. It observed that Cyclone Ockhi which struck the state in 2017, followed by severe floods in 2018 and 2019, and the COVID-19 pandemic from early 2020 posed challenges in revenue generation.
The committee has recommended the UDF government to restructure the State Planning Board, introduce a performance management system in the government and steps such as increasing the retirement age and opening up more employment opportunities to address the fiscal crisis.
