Reforms essential for ‘take-off’ of Kerala’s economy

Kerala Budget 2025-26 analysis highlights fiscal challenges, calls for private capital attraction and institutional reforms for growth.

The Kerala Budget for 2025-26 was presented against the backdrop of an ever-deteriorating State finances.

Total outlay is budgeted to grow by 14% from the revised estimates (RE) in the next financial year. RE for the current year casts doubts on all budgeted figures as they display significant variation from Budget Estimates (BE). For example, the Budget size has shrunk to ₹1,78,771 crore (RE) from ₹1,84,327 crore (BE). This is in spite of a slippagein fiscal deficit from budgeted 3.4% to 3.51%. Share of Central taxes is up by ₹1,668 crore whereas grant-in-aid has fallen by ₹3,686 crore. What is to be noted is a dramatic fall in capital outlay from budgeted ₹5,680 crore to a meagre ₹669 crore!

In this context of declining capital expenditure, it is difficult to take the Finance Minister’s announcements on investment projects seriously. Continuing with a State-led development approach is going to take Kerala to deeper crises. The way forward for the State is to make massive reforms to attract private capital. That private capital is not at odds with welfare State is clear from the experience of Nordic countries which we often relate to.

Again, the investment which is wooed by offering too many concessions is neither sustainable nor of high quality. High quality investors prefer destinations characterised by transparency, accountability, harmony and above all, good governance. Hence we should expend our energies on putting our house in order instead of chasing capital.

The government seems to be desperate to mobilise revenue. The hike in land tax and tax on electric vehicles are pointers to that. Land tax is going to hurt ordinary people and higher tax on electric vehicles will slow down the green transition. The government should try to streamline GST collection and recover various tax dues. Ultimately, revenue growth is possible only with faster growth of the economy.

Kerala’s weak point here is that it does not have a mega city. Mega cities with per capita income and economic activity above a threshold level will enjoy agglomeration economies, which will attract investment and talent. We have not succeeded in allowing any of our urban centres to cross that threshold. It is urgent that at least one town in Kerala grows to that scale. The ‘special development zone’ announced by the Finance Minister in his last Budget could have initiated this. Special focus can be given to service sector for this growth, as our endowments favour it.

Announcements on foreign and private universities were missing in the Budget. A State dreaming to become a knowledge society keeping competition at bay in higher education is curious. In fact, the youth and new entrepreneurs in Kerala are a confident lot and are globally competent. They just need the right environment to discover their genius.