Kerala’s development paradox

Kerala has long been recognised as a unique model of development among Indian states, particularly for its remarkable social achievements despite modest economic growth. The state’s success in education, healthcare, and human development has attracted global attention from scholars examining whether high-quality social outcomes can be achieved without robust industrial performance. Kerala ranks among the top Indian states in human development indicators with high literacy, low infant mortality, long life expectancy, and minimal poverty and recently topped the SDG India Index 2023–24.

However, despite these achievements, Kerala has been struggling to sustain its industrial growth and manage increasing fiscal distress. While it ranks 11th among Indian states in projected Gross State Domestic Product (GSDP), with an estimated Rs 13.11 lakh crore for 2024-25 and a per capita GSDP of Rs 2,95,787 (2022–23) compared to the national average of Rs 1,96,983, its economic growth has slowed. The RBI’s Handbook on Statistics on Indian States 2023-24 placed Kerala 30th in the last five years’ economic growth among 33 states and union territories. In recent years, Kerala has emerged as one of India’s most fiscally distressed states, primarily due to its high debt burden, limited revenue sources, and reduced fiscal autonomy. The Comptroller and Auditor General (CAG) Report 2023-24 reveals that Kerala’s total revenue receipts amounted to Rs 1,24,486.15 crore, while revenue expenditure reached Rs 1,42,626.34 crore, leaving a revenue deficit of Rs 18,140 crore. Including borrowing needs, the fiscal deficit stood at Rs 34,258 crore, nearly 3 per cent of GSDP.

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A deeper look at Kerala’s fiscal structure explains this vulnerability. More than 73 per cent of revenue receipts are spent on salaries, pensions, and interest payments, all non-discretionary obligations. The CAG report notes spending of Rs 38,572 crore on salaries, Rs 27,106 crore on pensions, and Rs 25,644 crore on interest payments. This leaves less than a quarter of revenue for essential services like education, healthcare, infrastructure, and welfare. In effect, Kerala is borrowing to meet basic expenses, leaving little fiscal space for future investment, much like a household that spends most of its income on loan repayments and bills, with little left for food, children’s education, or savings. Kerala’s public debt receipts for 2023-24 touched a staggering Rs 1,04,354.86 crore, but only 13 per cent of this, about Rs 13,584.45 crore, was used for capital expenditure.

This means that only a small portion of borrowed funds was allocated to creating assets, while the rest was covered by day-to-day expenses. Five years ago, nearly a quarter of borrowings supported productive investments; today, debt increasingly fills routine financial gaps. The effects of this shift are readily apparent in the daily lives of citizens. They observe deteriorating road conditions, ageing school buildings, and overstretched healthcare facilities, all of which occur alongside a rising debt burden. The Kerala Fiscal Responsibility (Amendment) Act, 2022, had set ambitious goals: eliminating the revenue deficit and achieving a 0.8 per cent revenue surplus of GSDP by 2023-24, and limiting debt to 33.7 per cent of GSDP.

In reality, the state reported a revenue deficit of 1.58 per cent, while debt reached 36.23 per cent of GSDP, slightly improved from the previous year but still above target. Though the fiscal deficit (2.99 per cent) remained within the 4 per cent ceiling, this was mainly due to reduced expenditure rather than increased revenue. In summary, Kerala did not meet its own legally mandated financial targets. A significant challenge lies in the composition of Kerala’s revenue. In 2023–24, tax revenues stood at Rs 96,072 crore, but grants-in-aid from the Union Government declined sharply to Rs 12,068 crore, less than half of what Kerala received two years earlier. This reduction, coupled with only moderate growth in state taxes, tightened the fiscal space even as expenditure demands grew, especially for welfare programmes, subsidies, and healthcare.

Though it shows, Kerala continues to prioritise spending on social programmes to support human development. However, this commitment has led to increased financial strain. The state’s financial strain has even led to a petition before the Supreme Court, alleging that Kerala has been denied its constitutionally guaranteed share of revenue. Despite its efforts to improve tax collection relative to GSDP, Kerala remains heavily dependent on central transfers and grants. These fiscal pressures directly affect citizens, with over two-thirds of state revenue absorbed by committed payments, and little remains for infrastructure development, such as schools, roads, or public transport. Consequently, community development projects stagnate, leading to long-term socio-economic challenges, including traffic congestion, insufficient educational facilities, and weak transport networks. Rising public debt also increases interest obligations, diverting future revenues to repay today’s borrowings.

To cope, governments may resort to raising taxes, cutting subsidies, or increasing user fees, potentially worsening living costs and inequality. High deficits also weaken Kerala’s ability to respond to natural disasters, health crises, or economic shocks. For a disaster-prone state with strong welfare expectations, this fiscal rigidity poses serious risks to public safety and well-being. Limited financial flexibility delays responses, amplifying hardship during crises. Kerala’s fiscal challenge is also rooted in its distinct economic str ucture. Unlike manufacturing-based states, Kerala’s strength lies in the export of human capital, particularly skilled workers in education, healthcare, and the service sector across India and abroad. This has generated enormous remittance inflows, accounting for nearly 23 per cent of India’s total remittance, benefitting both Kerala’s households and the national economy.

Yet, remittances do not directly translate into significant tax revenue for the state. This creates a paradox: while Keralites are relatively prosperous, the state government remains financially constrained. Unlike states that export goods and collect production-based taxes, Kerala cannot tax exported labour, limiting its fiscal capacity. Kerala’s challenges extend beyond fiscal imbalances. The state faces recurring floods, natural disasters, an ageing population, and an ongoing brain drain as youth and skilled professionals migrate for better opportunities. Environmental degradation further compounds these problems. Inefficient dam management, unregulated quarrying in the Western Ghats, illegal forest encroachments, and ecologically insensitive tourism projects have increased Kerala’s vulnerability to disasters.

The Gadgil Committee Report warned that extensive mining and quarrying in environmentally fragile zones heighten the risk of landslides, and the prediction has been consistently proven correct in recent years. Addressing these environmental challenges demands stricter land-use regulation, improved disaster management, and a commitment to sustainable development that balances tourism, infrastructure, and ecology. Kerala’s resilience depends on aligning its environmental policies with long-term safety and sustainability. Another emerging challenge is population ageing. With one of India’s highest proportions of elderly citizens, Kerala must move beyond viewing older adults as a non-productive group. Instead, the state can leverage their skills and experience through flexible employment, mentorship programmes, and community-based initiatives, turning a potential burden into a valuable resource. Kerala’s dependence on remittances also exposes it to global economic fluctuations and migration trends.

Diversifying its economy by revitalising small-scale industries, promoting green technology, and encouraging entrepreneurship could create sustainable domestic growth and reduce overreliance on external income sources. Enhancing vocational training and research-linked higher education can help retain youth talent while aligning skills with emerging sectors such as renewable energy, biotechnology, and digital services. Experts argue that fiscal reforms at the national level could also ease Kerala’s strain. They suggest that the Finance Commission’s devolution formula should better reflect contributions of human capital to national development, not just tangible goods production. Service-oriented states like Kerala play a crucial role in India’s growth by supplying skilled professionals nationwide and abroad. Recognising this contribution in fiscal transfers would provide Kerala with fairer and more flexible financial space.

Ultimately, Kerala’s experience illustrates the complex trade-off between social progress and economic sustainability. The state has demonstrated that prioritising human development can lead to remarkable social outcomes, even without rapid industrialisation. Yet, sustaining this model requires a reimagined approach, one that strengthens fiscal discipline, expands revenue bases, promotes sustainable industries, and protects the environment. Kerala’s most significant asset remains its people, educated, skilled, and globally connected. By reforming its fiscal management, fostering local enterprise, and adapting to demographic and ecological realities, Kerala can build a resilient, inclusive economy. With adequate budgetary support and forward-looking governance, the “Kerala model” can continue to serve as a blueprint for equitable and sustainable development in India.

(The writers are Assistant Professors, Department of Economics, CHRIST (deemed to be University)