15 ways Kerala can come out of severe financial crisis

Kerala is now burdened with outstanding liabilities of Rs 5.07 lakh crore and unpaid arrears of Rs 48,733 crore, according to a new white paper on the state's finances tabled in the Assembly.

The report, titled Kerala's Fiscal Health: A Status Report, warns that nearly 77 per cent of the government's revenue receipts are swallowed by committed expenditure on salaries, pensions and interest, with interest payments alone consuming around 20 per cent. As a result, capital spending has slumped to just 1.3 per cent of GSDP, one of the lowest among Indian states.

The document flags a worrying reliance on heavy borrowing and short-term credit to keep the treasury afloat, alongside mounting unpaid dues rolled over from the previous government. It also highlights how off-budget entities such as KIIFB and loss-making public sector undertakings have added parallel liabilities and eroded Kerala’s borrowing space.

To tackle what it calls “structural stress” from high fixed costs, a weakening revenue base and hidden debts, the white paper calls for sweeping reforms in spending discipline, institutional restructuring, PSU and KIIFB clean-up, and policies that can crowd in private investment and revive sustainable growth.

The key recommended structural reforms include:

1. The state currently spends nearly 80% of its resources on salaries, pensions, and interest, leaving little room for development. The document suggests aligning the retirement age with that of the central government. Increasing the retirement age by just one year is estimated to save the state approximately ₹6,000 crore in retirement benefits.

2. The report recommends moving to a ten-year cycle for Pay Commissions, similar to the central government, rather than the current five-year cycle.

3. The report advocates for downsizing the government while simultaneously simplifying administrative processes through genuine digitization to improve accountability and reduce costs.

4. Another recommendation was shifting the distribution of welfare pensions to an Aadhaar-linked direct benefit transfer (DBT) system to find savings and ensure efficiency.

5. Because Kerala Infrastructure Investment Fund Board (KIIFB) borrowings now count against the state's official borrowing limit and carry higher interest rates than government loans, its original purpose has been negated. The report suggests that KIIFB should no longer borrow independently from external sources. Instead, the Finance Department should borrow at more favourable rates and channel those funds to KIIFB.

6. The report suggests ending the statutory earmarking that diverts 50% of Motor Vehicle Tax and the entire Petroleum Cess directly to KIIFB, bringing these revenues back into the Consolidated Fund of the state.

7. It also suggests that KIIFB be brought under the full budgetary control of the Finance Department and subjected to a Performance Audit by the C&AG. Its professional capacities in project appraisal and inspection should also be absorbed into or made available to standard government departments.

8. With accumulated losses of PSEs reaching ₹72,851 crore by 2024-25, urgent restructuring is recommended. This includes transitioning from "production-based" subsidies (absorbing enterprise losses) to "consumption-based" subsidies provided directly to beneficiaries via DBT.

9. Another recommendation is to merge the profitable Kerala State Beverages Corporation with the loss-making Kerala Civil Supplies Corporation (Supplyco) to offset losses and reduce the overall tax outgo.

10. The report suggests considering disinvestment, privatization, or closure for non-strategic or non-viable PSEs, while protecting workers' interests.

11. It also suggests opening the power sector to private and central public sector investment to rapidly increase generation capacity, as the Kerala State Electricity Board (KSEB) lacks the resources to do so alone.

12. To broadening the tax base, the report suggests moving beyond traditional tax administration, particularly in the services sector and domestic production.

13. The report pitches for resolutely encouraging heavy private sector and cooperative investment in sunrise sectors like AI, higher education, and IT to drive growth and job creation.

14. Yet another recommendation is to recast land and labour laws to make the state more attractive for industrial infrastructure development.

15. The report recommends that local bodies play a larger role in promoting industry, similar to models seen in other rapidly developing economies. This includes creating mechanisms for local bodies to issue municipal bonds to raise funds for infrastructure from the market, which currently falls outside the scope of off-budget borrowing restrictions.