The Kerala Legislative Assembly was presented with a sobering report on Thursday, painting a bleak picture of the state's financial inheritance.
Tabled by Chief Minister V.D. Satheesan, who also holds the finance portfolio, the White Paper warns that behind the state's world-renowned social achievements lies a "fiscal structure under serious and growing strain".
The document, titled Kerala's Fiscal Health: A Status Report, was drafted by a committee of experts led by former Union Cabinet Secretary K.M. Chandrasekhar. It serves as a candid "look behind the veil" of annual budgets, revealing that the state is struggling to pay its daily bills while carrying a mountain of debt.
Ten major hardships facing the state treasury
The report identifies ten critical areas where Kerala's financial health has deteriorated to a point of "structural stress".
A mountain of debt: Kerala's total outstanding liabilities-the total money it owes-is estimated at a staggering ₹5.07 lakh crore. This represents 35.5% of the state's total economic income, known as the Gross State Domestic Product (GSDP).
The "pay-and-pension" trap: A massive 77.6% of all revenue the state collects is immediately swallowed up by committed expenditure. This is the "unavoidable" spending on government salaries, pensions, and interest on old loans.
Negligible investment: With most money going to paychecks and debt, only 1.3% of GSDP is spent on capital expenditure-the money used to build roads, schools, and hospitals. This is among the lowest in India.
Treasury on life support: The state treasury is in a state of "chronic cash stress". In 2024-25, the treasury ran a negative balance for 10 out of 12 months, forcing the government to rely on emergency credit from the Reserve Bank of India (RBI).
A massive arrears burden: The new government has inherited unpaid bills totalling ₹48,733 crore. This includes money owed to pensioners, teachers, and contractors that has been "deferred" or pushed into the future.
The KIIFB problem: The Kerala Infrastructure Investment Fund Board (KIIFB), once seen as a way to borrow money "off-budget", is now a major liability. Since these borrowings are now counted as state debt by the Centre, KIIFB has lost its original purpose.
Unfair project distribution: The report notes that KIIFB spending has been politically concentrated rather than based on need. For instance, Kannur district alone received over 20% of all approved funds, while other areas were left behind.
The squeeze on the vulnerable: As the fiscal space shrinks, the hardest hit are the marginalised. Plan spending for the welfare of Scheduled Castes, Scheduled Tribes, and minorities has plummeted from over 9% to just 3.85%.
Budgetary "sleight of hand": The report accuses previous budgeting of being "defective". It notes that actual income was consistently overestimated by about 10%, leading to "injudicious" financial planning.
Vanishing central support: Kerala has faced a sharp drop in financial grants from the Central Government. The end of GST compensation and the loss of Revenue Deficit Grants have left a ₹20,000 crore hole in the 2026-27 budget.
The dead weight of public sector undertakings
A significant portion of the state's stress comes from its public sector undertakings (PSUs)-government-owned companies. Kerala has 132 active PSUs, but instead of making a profit for the people, most are a "dead weight" on the budget.
The accumulated losses of these companies rose from ₹31,571 crore to ₹78,851 crore in just three years. The report highlights three "public utilities" that are the biggest drains on the treasury:
KSRTC (transport): The state bus service has incurred losses every single year, eroding its financial position. It currently owes the government over ₹11,600 crore in unpaid loans.
KSEBL (electricity): While it reported a small profit recently, the report calls this a "financial sleight of hand" because it was based on a government bailout. KSEBL is also accused of holding onto electricity duty collected from citizens instead of handing it to the treasury.
KWA (water): The Water Authority's losses more than doubled in six years, further deteriorating its financial position.
Proposed solutions: a road map for reform
The committee does not only diagnose the situation; it proposes ten policy shifts to "put in place measures to promote growth".
Open the doors to private investment: Since the state has no money, it must "resolutely encourage" private companies to invest in sectors like higher education and technology.
Power sector shake-up: The state should allow private and central government investment in power generation rather than relying solely on KSEBL.
The "Bevco-Supplyco" merger: The report suggests merging the Beverages Corporation (alcohol sales) with the loss-making Civil Supplies Corporation (Supplyco), using liquor profits to offset subsidised food costs and reduce the tax burden.
Direct benefit subsidies: Instead of supporting loss-making companies to keep prices low, subsidies should be given directly to the poor via bank accounts (Direct Benefit Transfer).
Selling unused assets: Non-strategic, loss-making PSUs should be closed or privatised, and their "vast tracts of land" sold or repurposed for productive industries.
Raising the retirement age: The report notes the state could save roughly ₹6,000 crore for every one-year increase in the retirement age, aligning it with Central Government standards.
Ten-year pay commissions: Pay revisions should occur every ten years, similar to the Centre, instead of every five years.
Aadhaar-linked pensions: Welfare pensions should be distributed through Aadhaar-linked bank accounts to eliminate "ghost" beneficiaries.
Digital government: Each department should be given a three-month target to simplify and digitalise procedures.
A forensic audit of KIIFB: The committee recommends a detailed forensic audit of KIIFB's accounts, citing high costs and concerns over transparency, including "Masala Bonds".
The report concludes that Kerala can no longer afford "business as usual". While social indicators remain strong, the financial foundation required to sustain them is under strain. It warns that the path ahead requires "hard political decisions" and a shift away from borrowing for day-to-day expenses towards investment in a productive economy.